Some weekly commentaries are chock full of information, editorial content, market swings, economic data, and the like. Others, like today, reveal nothing magical about the preceding week or the outlook ahead.
Which makes this a rather unique
and eventful missive, itself.
As we look at market activity during the first 10
months of the year, my perspective is shaped by the fact that despite expected,
and inevitable, cyclical drawdowns, the image of this year is a near-linear
upswing in equity valuations. Whether caused by specific reactions to
economic events, or simply a release of pent-up expectations, the sheer
magnitude of the averages’ percentage increase is a one-off, and untraditional,
event.
In fact, extremes like this
when seen as “downside events” would make most investors run for the
hills. In like fashion, many are chasing
after the train has well left the station.
This is not to diminish the
impact of radical global economic shifts which have neutralized a lot of the
bad news of the previous decade. Rather,
we must make note of the rules which govern market statistics and analysis to
point out that today’s stochastic
(relative strength) integers infer that while there is, indeed, a new flight to
quality and equity expansion, the trend lines which support that euphoria are
unlikely to sustain such a one time magnitudinal surge.
We want to believe that “new
high” trends will persist, we really do.
But we know as investors, statisticians, and citizens that nothing goes
straight up…forever. We are in a stock
pickers paradise, and loathe to see a bigger picture.
Yes, go.
While there is no denying a
sea-change in expectations about portfolio performance, let’s drill down from
an across-the-board approach to investing to explore some of the specific
sources of global equity expansion.
It begins with the demise of the credit markets. Consistently,
the lack of a suitable alternative parking place for our investment funds has
led to a default bonanza for equities.
The long-term is always good for stocks, but in this instance there was
a benevolent confluence of credit (interest rate) erosion and a bear market in stocks brought on by a myriad number of
systemic economic failures, such as overspending and excessive leverage.
This put us in a distinct
opportunity to capitalize upon the same type of negative stochastic integers, then, as are currently being touted
as positive, today. On either end of a probability scale, the excesses nearly always lead
to a manic reversal in performance.
If pressed, how many of you
would bet on today being the optimal entry point for stocks if you had new
money, versus a starting point four years ago?
The irony is, and remains however, that there are no other alternatives
for capital investment. We have either turned a major (psychological)
corner, or we are destined to expire today’s relative strength message.
In a market where any news precipitates upside or downside
excitement, every rally becomes a seduction song that cannot be ignored. In a week such as last, we should not
conflate the absence of bad news as a surrogate for good news.
In the meantime, we continue
to stay “fully invested”, which for our balanced accounts means at least 30% in
cash reserves. It is still possible to
outperform the benchmarks, near term and long, by prudently selecting solid
earnings and long duration price trends, without going all-in or becoming
inexplicably manic.
Knowing what we do today,
opportunity is capricious and not formulaic.
A restrained week, indeed.
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