Market Commentary for the week of August 12, 2013

Preparation.
Despite the market’s jittery, almost daily, responses to the Federal Reserve’s inferences about “taking their foot off the pedal”, the reality is that secular changes, like the kind considered, occur very slowly and give us enough time to prepare for, and analyze, the consequences real and imagined.  Most importantly, we need to see significant changes in data, and perception of that data, over the long term in order to corroborate the Fed’s decision.

Most observers foresee a redirection in interest rates, anyway.  At these levels there’s not much more room on the downside for rates to go, and their impact upon economic stimulus at this point is still questionable.  Where are the buyers and cash hoarders if these generationally low savings and borrowing rates can’t engender confidence…or speculation?

The anticipation of the Fed’s actions have been much discussed and have already resulted in a tapering in public bond buying, and therefore a new appreciation of global equity potential.

Assuming that rates reverse course, we should expect a two to three year window of cyclical economic redirection and a gradual reallocation of portfolio risk.  If, in fact, portfolios were to lose yield power during this time, one would hope that economic fundamentals would commensurately be improving, offering the potential to mine the equity markets for capital gains in technology, manufacturing and industrial development (sectors which heretofore have remained dormant during the recession).  A solid base of earnings and dividend performers would more than offset a decline (erosion) of income power from bonds.

Obviously, it is critical to have a discipline, a focused approach, that complements one’s risk profile.  As you might imagine, the same risk assessment one employs today would be as valid in the future, simply using different data for different economic times.  Jumping from strategy to strategy, however, is not the right way to go, in my opinion.  That means that you have no overriding plan, or science, with which to evaluate the “fluid” times in which we live.  Those who got “suckered” by the dot.com siren song of the 90’s know what I’m talking about.

Falling.

Rather than this type of strategic methodological planning, I witness, on a daily basis, a more neurotic response to fundamental data.  Many investors pay only passing homage to terms like “the Fed”, or “the G-7”, or “the New York Stock Exchange”.  The average working person, professional in their own right, finds our involvement in the world of Wall Street to be capricious and mostly insignificant to their own situation.

Of course, we know that finance and economics are extremely important to the world in which we live.  But how do you respond to someone who laments that they work “as hard as they can” but see no economic or social advance?  The heavy toll of tuition, medical costs, housing, transportation, food, and miscellaneous items eats into the average paycheck, and savings account, as no other time in the past two generations.  These citizens are too busy to check the stock pages or the Dow Jones Industrial Average.

Time is not always money.  Those who are well-off still feel “401-k vulnerable”, while the less fortunate are working several jobs to make ends meet.  The percentage of time and money spent worrying about, and working towards, wealth creation is greater now than ever, while the actual reward is less.  A larger percentage of people are probably worrying about wealth than acquiring it.

Typically, financial institutions spend their time worrying about how to acquire greater profits from their clients.  There is no question in my mind that the disconnect between institutions and the citizens they serve is getting wider, not smaller.

It’s not complicated.  We all live on this “blue marble” together.  Why get up every morning if not to improve the lot of ourselves and others with whom we share the ride?