Market Commentary for the week of September 21, 2015

What now?

In an acknowledgement to worries about the vibrancy of the global economy and its reverberating effects upon the US, the Federal Reserve Board's most anticipated announcement about interest rates last Thursday did little to quell market concerns.

Their statement maintained a "bias" towards a rate hike sometime in the near future, but left interest rates unchanged for the present.

The reasoning behind this decision pertained mostly to developments abroad, most notably in China, which are putting downwards pressure on inflation and capacity elsewhere, despite solid evidence that the global recovery is taking root.

This temporary retreat puts us squarely in the same situation as we were before, one in which micro-predictions and market volatility take precedence over macro planning, true investing, and asset allocation modeling.

So now that the announcement has been made, I think we should look back at the lethal volatility and panic which punctuated the run-up to Thursday. 

We know that this has been a terrible quarter for market performance, but the inordinate jockeying for position and speculation that characterized the past few months was excessive and unwarranted.  Secular patterns in interest rates already tell us what we know: interest will rise, must rise, no matter what the Fed would have said or will say in the future.

Market forces by themselves are much stronger than man-made manipulation.  Inflation is a by-product of economic growth.  Our nascent economic turnaround will spur profit growth, price pressure, and, indeed, higher costs of borrowing.  Why, then, all the turmoil and manipulation in the stock market?

Up is down

Mostly because the US and global bourses became the sole beneficiary of monetary intervention.  Some would argue that supporting the stock market was actually the mandate of Fed policy.  At a time when they left little margin for error, the Fed governors must surely have realized that not only are monetary factors in play when announcing their policy statements, but so too are the fiscal and psychological effects of those decisions.

Unfortunately, we have been relying upon "easy money" and a lack of alternative investments for too long for there not to be a tremendous reshuffling of the deck prior to these announcements.  The central deception in all market performance during the past year and a half is that stocks were acting on their own.....as if no other factors except for consumer demand and corporate governance played a role.  In fact, no single factor except for the cost of money  influenced market performance more than any other!!

So, are the financial markets better off as a result of Thursday's decision?  Not really.  By dint of their actions, the Fed board will set in motion yet another "mechanical" reflex, a reaction solely to their moves, not the "invisible hand" or secular forces which traditionally govern the convention of economics.  We will be dealing with this discomfort and volatility for several months hence, until the next Board meeting.....the "next most important" monetary inflection point.

There seems to be an environment in which pecuniary boards across the globe impose a kind-of short term norm upon the financial markets as opposed to offering clarity about long-term financial, and thus psychological, direction.  As a result, the timeline becomes compressed and market-makers act accordingly.  If the monetary policy makers can't be clear about the macro data, how are investors supposed to deal with that same data?

I become concerned because markets seem to represent this dichotomy between short term signals and secular definitions, a distinction that stymies the expectations for those who have real money at risk.  In a practical world, one needs to be able to plan for, and quantify, the potential obstacles, as well as laying out a reasonable destination and expected level of risk.  Without splitting hairs, I think the Fed showed a lack of courage and foresight just as we got within striking distance of the finish line.

Market Commentary for the week of September 14, 2015

No stopping
Recent market volatility has definitely put a scare into investors who might have thought that the crash of 2008 was the worst they had seen in recent memory.  Obviously, when stocks are rising, as they had been since the credit crisis was "solved" by fiscal and monetary intervention, it is hard to focus on what could possibly go wrong (?), particularly when portfolios had been achieving record setting performance in the last two years.

Enter China, the Federal Reserve, and the energy markets.

Downdrafts from these uncertain factors eroded nearly three to four percent in the averages daily, aggravating an already tenuous situation created when stocks accelerated so long, so fast to "the top".  Unfortunately, also, the magnitude of the integers themselves made people nervous: no one likes the look of triple-digit market moves, especially to the downside!!

In spite of all the woes pushing sentiment and performance into negative territory, market breadth of participation  and relative strength integers (RSI)held up relatively well, all things considered.  The economic recovery and the "bull trend line" took a punch to the jaw, but did not fall to the mat.

It is yet to be determined if the data supports or refutes an omen of doom that pervades financial conversation.  I contend that equity direction and economic direction are becoming inversely correlated, particularly as the stock markets take a pause to digest their linear advance...and retreat...during the past few months.  We cannot, nor should we, conflate the activity of stocks with the positive direction of economic statistics.

In fact, when  (not if) the Fed raises interest rates, they will set in motion an alternative investment scenario (bond buying) that can only improve equity performance by stabilizing the degree of speculation occurring in stocks bought on margin, and by helping to build cash reserves and savings for investors looking for something other than stock market participation.

The only people who would be negatively impacted by a higher cost of money would be those who borrow above their means to pay back the loan.

Besides, the Fed would only raise rates if they had confidence in the strength of the economic recovery across the board, and if they believed that the surge was magnifying too quickly.  That's the good  news.  Others argue, however, that a rate rise has not yet been factored into equity prices and that its deleterious effects might be significant.  I disagree with the latter point of view.

From the maze

I expect that the extraordinary volatility of the last month will lead to a logical sector rotation that identifies a new paradigm of asset allocation, one which is different than an "anything goes", throw-a-dart type of mentality.  That shift should relate to inflation plays, yield opportunity, and a resurgence in tangible asset equities.  There is further opportunity for earnings expansion in consumer brands, multinational companies, infrastructure development, biotech research, alternative energy, and water-related ecology.

Although the extreme regression in portfolio valuation is discomforting, the worst I observe is that expectations and baseline performance metrics must be recalibrated.  We have not  begun a new bear market, nor a bear phase.

There is, however, a strong possibility of uncertainty in the next few weeks...October has historically been a "queasy" kind of month.  But signs are building that the data are transitioning into an inflection opportunity, a new and vibrant period of accumulation in equities trading well below their previous high water mark.  Now is not the time to give up or give in to hesitation and fear.

As quickly and as violently as upside short cycles can regress, so too can they initiate recycling back up again.  This, then, is a new reality in portfolio management for the foreseeable future.  Fasten up your seatbelt.  This looks like an E ticket kind of ride.