Score this round for the negativists.
As
investors lick their wounds over some heavy volatility and precipitous price
declines last week, reports on economic data and fundamental market analytics
also regressed just enough to take a little steam out of the bull rally. We witnessed some serious earnings
disappointments, there is still terrorism in the Mid East, a regional outbreak
of the ebola virus shook the global medical community, European growth
prospects suddenly turned sour, and domestic housing starts slowed. There is obviously enough concern built-in to
equity price advances that negative news, or even inferences about negative
news, can disrupt momentum, confidence, and valuations.
And
there is more to go around. Is the real
estate/housing boom sustainable? Can we
build earnings growth across the board in a low wage environment? Is energy really
in plentiful supply as the experts tell
us...enough so that prices for this depleting natural resource should regress
to levels of five years ago? Will the
Fed ever get around to releasing interest rates?
And who is watching suppressed inflation data
on food and discretionary spending costs?
I
believe the build-up in pricing pressure for agriculture, energy, healthcare,
and housing is much underestimated in the current data, and will become an
economic sticking point, particularly if employment data continue to do better
but wages are not commensurately rising.
In
that vein, all sectors in recent weeks have been impacted by a rush out the
door of investment capital. While it is
generally accepted that the cyclicals and industrials are more immediately
affected by nuance in the short-term, even the most strongly performing sectors
(non-cyclicals, utilities) witnessed capital losses in the past few weeks.
Hold
the fort
An
interesting confusion will arise for equity investors if/when interest rates do begin to rise.
Whether or not to retreat from hard-won gains and to redeploy wealth
into more secure/less volatile instruments is a difficult reality to
confront. One cannot, of course, try to
"time" the market, but we know intuitively what's coming.
The question is whether the stock markets not only do now, but will in the future, offer an appealing
blend of capital gains exposure along with balanced risk aversion. I believe the fourth quarter will offer a
glimpse into how that question will be answered. Thus far, it appears that investor's appetite
for risk exposure is waning, as more money seems to coming out of stock funds
than going in. Last week was a
kaleidoscope of emotions, cash flow, capital gains and losses, and portfolio
angst.
More
likely is that we are witnessing the origins of a new cycle calibration, one in
which sector rebalancing and portfolio allocation takes on a more conservative
bias. Our asset allocation models are
becoming more skewed towards resetting the stronger/fewer earnings performers
against a backdrop of disappointing expectations. Besides, two weeks doesn't make a trend. There is still the completion of this right
half of the parabola to experience.
Traders call this "backing and filling"; clients call it a
"slow water torture".
Is
there really any relevance to this capitulation? That
answer depends upon your preparedness. We
knew it was coming....just not when. One
should have already positioned for its eventual occurrence. A careful re-read of my previous missives
will show that I have been describing this distribution pattern for several
months, but by no means is this a repeat of 2008. We are still solidly in a bull expansion,
both for stocks and the economy-at-large.
The problem is that everyone is
impatient for something extraordinary to happen, that magic moment, even though
the markets are travelling at their own pace.
In
which case, the longer term uptrend is still intact.
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