Market Commentary for the week of June 1, 2015

Perpetual conundrum

Last week's volatility in the equity markets raises the specter that stock valuations may have out-run fundamentals....or not.  Despite the fact that economic data have been recovering, the financial markets appear to believe that a cautionary tale needs to be told, that higher interest rates correlate to a demise in equity price prospects.  I disagree.

In fact, stronger data should foretell a stronger  stock market, just not perhaps in the sectors that have already run.  That is why it is so important to rebalance portfolios and to consider sector asset allocation as more important than bottom-up stock-picking.

The odds favor the negativists, however.  It certainly needs to be factored that the markets have run fast and far in the last two years. “New high" breakthroughs confirms it is happening.  So, while it is impossible to quantify or predict defensive retrenchment valuations, it is more likely than not that the global markets might be due for a correction.

Most of the driving forces behind such negative prospects, though, are driven by a potential tightening in monetary policy, rather than declining projections about economic fundamentals themselves.  This is where the classic conundrum exists.  Do we follow the broader, long term possibility that the global market basket is expanding, or do we look at objective stock price data to conclude there's no more room to the upside?

Furthermore, for every negative story about stock prices there is a counterbalancing theory to be found.  In this case, lagging sectors               

(e.g. utilities, energy, basic materials) are rife with upside probabilities, including new sales and profit acceleration potential.

Notably, the configuration of those stocks "at the top" (financials, cyclicals, technology) appears to be finite in the short run and troublesome.  In the aggregate, these names have been priced considerably ahead of their own fundamental projections and have an intermediate profile that makes them look "too expensive" at the moment.  More significantly, the mania that drove these shares higher might shift at any moment to other categories, raising the potential of deflating their momentum.

Long -term

I always like to look at the longer term cyclicality as a way to gauge the relative performance probabilities of global shares and my portfolio performance.  In relative terms, the market is too expensive and we need to reign in the aggressiveness in our stock purchases while making more defensive allocation decisions.

While I am not downgrading my expectations for positive alpha throughout the balance of this year, I do think that last week's reaction to monetary announcements/projections raises the anticipation level for many investors.

I see this time more as an opportunity to reposition winners and losers in one's portfolio.  Rather than thinking about an impending correction, one should look at leading, laggard, and coincidental indicators as a means of lending support to our quantitative hypotheses about prudent asset allocation leading to positive portfolio outcomes.  There are several demographics which my quotients believe have long-term staying power and profit potential, including telecom, biosciences, ecology, and agriculture, to name a few.

Besides, any talk of a calamitous correction would be an exaggeration in the context of current global fundamentals.  Sustained growth prospects are improving, and reflect burgeoning consumer confidence and global currency equilibriums that are just now beginning to gain traction.