Recent history has shown us that when investors feel “prosperous” their spending habits become more robust. Sometimes they even throw caution to the wind and splurge on discretionary purchases they previously sought to avoid or postpone. Such is the nature of a rapidly changing landscape that what previously had been a vulnerability now becomes a necessity. The impact of financial decision-making can have a manic effect upon virtually any part of the world. This is why crises become epidemics, and cures become panacea.
The recent market calamity
prompted one of this generations most prolific negative responses, bringing
back memories of the 1929 crash. The
most worrisome aspect of the current “magna-response” is that unlike a
generational, tectonic fundamental response to what ailed us, the environment
was ripe for one-off cherry picking of depressed stocks (and sectors) so that
the catalyst for systemic change was never required. If we only had the patience, and the will, to
address some of the broader reasons for the selloff in the first place…
By comparison, the market
today is poised to run up against valuation expansion in a dramatic way. Though we may not realize it, this is not a
“golden age” for stocks. To be sure, there is a multiplicity of opportunity in
a variety of sectors and global regions, the fruition of which might take
decades. But, unfortunately, no one
wants to think about generational transpositions in this minute-by-minute society. So the ambiguities of long-term investing
morph into a “what have you got today?” wellspring of uninformed
choices. Pretty soon, portfolios get
locked-in and illiquid.
All-in.
Is the market discounting or
pricing-in the real landscape of today’s fundamentals? Well, the answer obviously depends upon your
discipline, frame-of-reference, and time horizon. In an all-or-none world the market appears to
be well balanced, recognizing an appropriate “upside bias” towards owning
stocks and bonds.
On the other hand, a more
likely scenario would say that manias are not good, up or down, and that
a gap between prices and relative strength ratios seems to be widening as
prices, and optimism, race skyward. If
it always takes a “worse-case” scenario to define a potential market
recalibration, one only has to look at the dot.com euphoria of a decade ago to
refute that point.
Profit by accident?
The current surprise is
that if fundamentals and prices are alright, why do so many households and
small businesses still struggle to increase margins? Is it only for
the megaliths to succeed, or can the crescendo of upside enthusiasm effectively
spill over to a broader capital base?
Remember, the averages were
down over 40 percent. A full rebound
only brings us back to “square one” as far as valuations are concerned. Consider that the Dow and S&P new highs
were also within reach 5 years ago.
There are domestic and
fundamental issues left to address that dramatically impact upon near-term
concerns about whether we can sustain current equity prices and the mindset
which drives them. Amid hopes that this
time is “for real,” take note that solutions don’t happen by accident, nor do
market troughs. The predominant trend
always recedes back to the mean, just as market disasters always capitulate
upwards. Today, it seems, is a case of
forgetting the root cause of the decline to the exclusion of a “feel-good”
story.
This suggests that the current
environment is not one which in and of itself could spark a recession or a
turbulent reversal in the financial markets.
Rather, it contains the elements which, if left unattended, could
produce an unexpected consequence of our boldness and impose a de-stimulative
impact upon equity valuations. The data
are not enough to cause a global slowdown, but they are, at their core,
a source of consternation which would make today’s new highs a possible
resistance point for the future.
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