Market Commentary for the week of May 18, 2015

In the wilderness
Growth and interest rates usually fit hand-in-glove and are emblematic of demand for goods and funds.  Logic dictates, however, that with interest rates low and demand un-impactful, the transition from recession to full-on economic boom will take some more time.

Congress, and Federal legislatures worldwide, seem caught up in the notion of low debt, austerity, and tax fairness.  But in an era of "fairness" the spender, the risk-taker, loses his advantage.  We should be mindful that the transitional dampening effect of balanced budgets is resulting in restrictive foreign trade, a high dollar, price deflation, and a cacophony of jingoistic rhetoric.

The consumer, for his part, has been marginalized because he has no alternative for risk-averse capital other than the stock market.

Wages and prices for commodities have yet to see any significant inflationary bias, even though secular trend cycles would indicate that the time is right for an upwards shift in each.

Ironically, current initiatives to engage in global trade are being met with vocal resistance from the public, the implications of which might be to serve political ideology, but also to subvert the necessity of creating new jobs and new outlets for product in a global marketplace.  Curiously, data reported last week confirmed that "small business" activity, including their confidence in the future, was up for the past year in all areas except top-line revenue or sales growth!!

Sometimes we get caught up in the confusion over profitability, consumerism, and competition.  It's easy to manufacture and manipulate stock market profitability.  It is much more difficult, though, to concoct demand  where none exists, and where the private sector has abdicated responsibility to build a "better mousetrap".

Thus, the equity market has to be very careful to distinguish between inflated (yet highly welcome) valuations, and unrealistic "profit" margins that simply reflect better year-over-year comparisons.  Without top line sales demand increases, all we're really seeing is an improvement in calibrations and statistics.

Skewed definitions

While we admire the bottom line as much as the next guy, we are suspicious that we are just treading water in the stock averages and the economy both.

Think about it.  We have had interest rates at historic lows for over five years.  The impact has not been as "historic”  as we might have expected, however, although the equity markets surely have found a willing source of alternative savings.  But where have the capital expenditure budgets been?  Aside from stock buy-backs and repurchases, there has been relatively little outlay for big bets, risk, and new research and development.

Those who simply "play the market", rather than making direct investments in the economy, are complicit in effecting a diversion of funds that staggeringly halt economic revitalization.  By their actions, real incentives for change are postponed in lieu of pocketing paper profits and portfolio aggrandizement.

It seems that we as a nation are averse to spending and borrowing patterns at almost all costs, particularly those profligate behaviors that got us into the big mess in the first place.  And rightfully so.  No one that I know is advocating for a return to irrational exuberance, unimpeded spending and borrowing, or an epoch of greed and selfishness. 

 
Remember, though, that a capitalist without customers quickly becomes an out-of-work capitalist!!

Market Commentary for the week of May 11, 2015

Where's the money?
Historically, the most potent bull markets for stocks are underpinned by significant consumer expectations and by overwhelming participation in share purchases by retail households.  How strange it is, then, that the basic premise of this post-recession bull market contains neither of those elements by and large.

Because of the severity of two bear market calamities during the last decade-and-a-half, retail behaviors have changed.  Enough so, that "the Street" has seemingly lost both its allure and attractiveness.

Were it not for monetary policies that decimated interest rates, the shift out of stocks might have been greater.

The "typical" supports for equity bull markets.... rising profits, productivity, and sales.... are not empirically in place to the extent they have been during other economic booms.  This does not mean that sales and profit numbers are disappointing entirely, although one can infer that producing these data consistently has imposed a strict toll upon businesses, and resembled, at times, a bit of accounting alchemy.  The love affair between Main Street and Wall Street is in remission.  The proliferation of the internet and manufactured products has indelibly changed the business of stock markets forever.

As investors seek out alternatives to buying stocks in the "traditional" manner, net participation in the financial markets overall has diminished significantly in the past 15 years.

Obviously, these data have been affected by economic recessions, market crashes, and personal shortcomings on the part of some of Wall Street's elite.  What's different this time is the depth of mistrust that has developed between the "average" citizen and those who populate the hallowed halls of major financial institutions.  The aristocrats keep getting wealthier while a vast "other majority" have struggled with the mire that the financial crises have left in their wake.  I know that I'll get disagreement on these points of view from many of my colleagues.  In fact, when I discuss this psychological disconnect with members of the Wall Street community and the media, I get an entirely different "stare" than when I have this conversation with clients.  Such is the magnitude of the issue....two sides to every story.

Extremes of any kind are disruptive to our norms, and tend to skew behaviors away from either end of the bell curve that persons might find objectionable.  Faced with the possibilities of these extremes, many investors feel more comfortable holding cash reserves than they do applying it to the stock market.

Expanding the horizon

Interestingly, though, investor's withdrawal from participating in risk activities has actually worked against  their best interests, while the net effect of the bull market has been to increase portfolio valuations of those bold enough to have "stuck it out".  In hindsight, risk averse investors created a self- fulfilling prophecy of negative consequences for their portfolios.

My view is that risk, like markets and life itself, moves in cycles.  There not only is a benefit  to taking risk, it is an expectation that one must.

And herein lies the markets' current problem:  Expectations and trust are at their lowest levels in decades.

It is not clear when/if investors will break through these negative stereotypes and reconnect with the financial markets, but until there is a strong mindset to do so, the markets will be building a castle on a sand foundation.

As I look at my data, there are enough long-term options in which to invest, such as biomedical research, infrastructure rebuilding, alternative energy, education, computer sciences, ecology, agriculture, water purification, and social healthcare to hold our attention and to generate capital gains for decades.

Are you still perplexed about which stocks to buy...?  

Market Commentary for the week of May 4, 2015

Apex
When the last Great Recession hit (2008) and it became clear that monetary policy along with severe fiscal policy measures were necessary to try to limit the damage to the economy, no one could have imagined or foretold of the remarkable stock market recovery that ensued.  For quite some time, the averages have been far outpacing their historical rates of return.  While fiscal policy will probably again be  required to regulate the status of the recovery, all eyes are now firmly upon the next moves by the US Federal Reserve to assess how, or when, they might begin tightening the flow of money.

Regardless of when they allow interest rates to float upwards, it will have an effect upon the acceleration in stock valuations which up to this point have seemingly been unabated.

The expansion of US equity shares is obviously a welcome sight for investors twice bitten in this generation by tech stocks (dot.com) and then bonds (credit crisis).  The "what” of  what's happening has been obvious.  Portfolio valuations are expanding.  The "why” has been given little attention.

Now, with Federal authorities ready to adopt changes to monetary policy, the focus will rightfully be upon interest rates and the dollar.

While there has been no singular catalyst to the US market surge, it is clear the impact of low interest rates and a strong dollar have had upon attracting capital to the financial markets.  All sectors have benefitted from the expansion in prices.  However, there might be concern going forward that a "high" dollar could inhibit exports. We saw reports last week that US Gross Domestic Product was contracting.   But the offset is that a relatively strong US economy provides the globe with stability and safe haven during a time of extreme financial discord.

Besides, any "losses" incurred by US corporations as a result of export diminution are tempered by greater consumer activity at home in sectors where pricing pressure has been modest.  The roles of great export nations are always in flux and rebalance.  Foreign sales notwithstanding, the strong dollar has kept inflation and prices low in commodities here at home.

The only drawback that my data might discern is that despite the statistics looking good "on paper", there still exists a deep wealth and wage gap in our nation which fosters a continuation of a "confidence crisis" that discourages discretionary spending from a segment of the population most disconnected from Wall Street's bountiful success.

Ready for change?

While we just referenced "low oil prices", for example, as an offshoot of the current recovery, have you started to notice a gradual cyclical shift in the price of gasoline at the pump?  Prices have risen by 20 percent or more since touching their lows in January.  For policymakers committed to sustaining the recovery, and policies which accommodate spending, this small inflationary uptick could pose some problems down the line.

In fact, it is the policy of over 27 global central banks to commit to austerity and future growth by directing monetary policy towards these goals.  The timing of the Fed rate hike, along with a gradual inflationary price push will be, for certain, the most anticipated new cyclical development for the markets worldwide and for market watchers alike.

Of course, any perceived increase in inflation would be modest, at first, compared with current levels.  But a change, nevertheless, would represent a new secular condition with which we haven't had to operate for several years.  Therefore, any redirection of a secular trend could be significantly adverse...or at least statistically important... to the elements of equity price growth which have heretofore been inconsequential.