Market Commentary for the week of January 28, 2013

A Matter of Opinion.
Last week in Davos, Switzerland there was a gathering of financial experts.  Although it's never easy to gain consensus on difficult issues, a poll of participants indicated that a majority believe that the European debt crisis and the American budget debate fallout were the most conspicuous reasons for concern about economic viability for 2013, and years beyond.

I think it's restating the obvious, but, clearly, earnings growth rates do matter and will influence participation, and confidence, in global financial markets.

Growth is not a given.  It is a by-product of innovation, tax policies, introspection, private capital and expectations.  We are not at crisis levels anymore, but neither are we devoid of doubts about public confidence in financial institutions.  Do we really believe that a culture of manipulation and chicanery by trusted corporations and financial stalwarts has been ameliorated?  What lessons were learned, and improved upon, that offer examples of contrition by those bankers and untouchables that gives us the motivation to jump "all-in" into the vagueries of investing?

Stress free.

There are signs as we come out of the box this season that there are fewer roadblocks to overcome.  Although not back to pre-crisis levels, earnings are improving, and not just in sectors from which one might expect seasonal movement.

If risks can be marginally balanced, it might be concluded that earnings, and stock prices, will finish the year better than they started.  In fact, the obstacles appear to be more man-made than systemic.  Policy shock is a greater threat than demographic over-optimism.  We need to get out of our own way and let growth, research and development, entrepreneurship, and capital flow freely.

I am not extremely comfortable with where bond yields are.  Struggling economies need stimulus, no doubt.  But low interest rates impede savings.  There is plenty of money sitting on the sidelines, to be sure, but without sufficient incentive to adjust risk, between stocks and bonds, within one's portfolio, there develops a bias towards risk that is not satisfactory and not always a function of choice or appetite.

Go low.

Also at this European conference, attendees concluded that it is ultimately "good" not only if the real economy picks up, but also if our optimism about the economy regenerated, as well.  In terms of policy, that means avoiding the excessive hubris and greed which destroyed the fabric of trust that binds us all to the game.  Managing human emotion is "do-able," but the most difficult of all tasks.

In a month, in six months, the truer story will unfold.  We may not know how to get there, but so much in life is unknown and uncertain.  Think about your portfolio.  Now think about what you like about investing, what you like least.  How often you conjure positive thoughts about the markets is likely the common denominator that will ultimately move the needle upwards or downwards.

In either case, complacency is probably not the best option.