An already skeptical market took a huge turn for the worse early on, then recovered at week's end, because of jitters about Greece's ongoing debt drama and China's sagging equity shares. The selloff only highlights the "globalization" of financial data and adds one more thing to worry about for US investors. Whereas I had previously written that sufficient firewalls had been built into global financial exchanges following the credit collapse in 2008, there was, nevertheless, an overwhelming uncertainty about financial markets' stability after the Greek nation's "No" vote on austerity measures proposed by its EU partners. Accordingly, the selloff in global financial markets last week was more attributable to very high relative strength quotients as a result of consistent new highs in the averages than to pandemic fundamental flaws in global economic structure.
It
would be entirely reasonable to expect continued pressure on stocks in the
short term, without breaching any of the powerful trend lines created during
the past five years. There will always
be peaks and valleys in portfolio management.
It is foolish to believe that investing is a straight-line-up
proposition.
Last
week represented the first real sign of panic about portfolio sustainability
since the bull rally began in 2009.
Fundamentals, which have been improving, all of a sudden took on an air
of vulnerability, giving many a chance to adjust their expectations about
near-term performance. We see no reason to make such a mid-course
correction given that analyst's earnings projections for equities had already
somewhat been tempered by the inordinate rise in stock valuations. By and large, one must still pay attention to
which sectors are showing improvement, and then
drill down to specific equities within those sectors to compare prospects for
long term earnings sustainability.
Right
now, I see examples of "news-proof" duration in technology
(semiconductors), non-cyclicals, and high yield utilities.
If
we can maintain modest, definitional improvements in domestic GDP and earnings
acceleration, the net effect of the EU distress upon Dow shares would begin to
dissipate. As mentioned above, there has
already been a slight diminution of analyst's projections and expectations
which I think should help to tamp down investor's reactions to events not yet
happening.
Without
meaning to sound condescending, it looks to this observer as if Russia, Germany
and Greece are re-litigating the Second World War, only this time with
drachmas, Euros and rubles instead of bullets and tanks. There is no shortage of ego and power in this
storyline as the Ukraine situation earlier this year revealed. While the end chapter to the EU/Greece saga is
clearly being written as we speak, the tailwinds for financial markets are much
stronger than the headwinds as we enter the second half of this year.
Gear shift
We acknowledge that it is difficult to adjust one's mindset "on the fly" in the face of such amorphous news. The euphoria of the past few years which drove the Dow and S&P to new highs has generated such a psychological and remunerative rush that we really should have anticipated a slowdown in acceleration patterns even without Greece and its issues. Historical patterns of appreciation in financial instruments resemble more a tortoise than a hare. That 30 percent climb in 2013 put everyone in a terribly unrealistic frame of mind and set up a gambler's mentality.
In
fact, investing requires time-consuming research and enormous patience. Building net-worth does not happen
overnight. But because, in this
instance, investors had gotten used to big percentage gains, their expectations
as well as their behaviors became highly speculative and unrealistic,
substituting seduction for methodology and science. Plodding along slowly is neither attractive
nor stimulating, but it is a formula for risk reduction and portfolio
aggrandizement in the long run.
Acknowledging
some bumps in the road owing to current events (such as China, technology
"glitches", and interest rates), our tracking algorithms nevertheless
see a pattern in stocks similar to the 1980's when dividends and capital gains
were more definitional and in line with nominal rates of return. Our discipline also predicates the market as "parabolic", with ups and
downs punctuating a current pattern of bottom-left
to top-right.
The
worst thing that could happen....with all the news about Greece, S&P
gyrations, monetary pressures, etc......would be for investors to jump from
style to style, opportunity to opportunity, in search of an elusive panacea.
Perfect
rainbow endings are only for fairy tales.
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