Patient
resting comfortably
While
we managed to endure through a series of up and down cycles in the past 6
weeks, evidence convincingly suggests that the economic recovery and the bull
market are sustaining. Midweek rises in the S&P, Dow Jones, and other
global exchanges confirmed that investors are hungry for good news, even if it
is short lived. Reports of a modest
uptick in consumer prices and wages, for example, did not turn out to be the
precursor for a recovery-busting inflation spiral that some had feared. Quite the contrary, they are indication of a
vibrancy, albeit hidden beneath ordinary perception, that offers hope beyond
the rhetoric of a rancorous political season.
The "bogey in the room", a rate increase by the Federal
Reserve, is demanding to be perceived as a good thing.
This
kind of stirring in the tailwinds is necessary to confirm that policy
initiatives and consumer confidence is starting to take root.
Additionally,
the cumulative good news from the current earnings season demonstrates a persistence
in share recovery in a number of sectors previously hard hit. Although I bemoan the fact that many of these
profit accelerations are happening without robust capital expenditures and
consumer spending, earnings patterns are more likely to expand than contract
if/when the consumer finally does filter back into the equation.
However,
the" jumbled mess" that is the stock market is another phenomenon,
altogether.
While
the data might indicate progress in corporate profitability, traders are
punishing any company's shares that don't meet the smallest of yardsticks, or
which aren't the darlings of hedge funds and institutions. Even the most modest of warnings
("guidance" is the term we use on Wall Street) leads to discounting
of current valuation. We saw last year
how the Energy sector got punished in this way.
Now it appears as if retail stocks (Cyclical) are feeling the wrath.
All
major global bourses are experiencing the weight of expectations like this,
even as their economies are modestly climbing out of recession.
Here
in the US, for example, the S&P broke its October winning streak abruptly
in the last two weeks, bringing total return for 2015 back to "zero"
or just below. These capitulations seem
to be driven more by panic and psychology than by real numbers. As a result, investors have a choice either
to fixate upon the market's performance integers, or to realize that many data are
much better than they were just prior to and just after the onset of the
recession in 2008.
Yes,
we do have much further to go to rebuild market/economic equilibrium, but at
this juncture in the secular recovery the risks of falling back into recession
are quite low. Evidence would suggest
that Main Street's apprehensions are misplaced or overdone...even if one
acknowledges that the economy is not yet in a perfect place.
Playing
through
Think
of it this way: since analysts typically
make year-over-year comparisons when offering their evaluations, shouldn't we
consider that even tepid increases in sales, profits, or capital expenditures in
the next few months might yield better comparative returns in the next year's
earnings cycle?
It's
clear that the markets are riding with "one foot on the brake", and
very few of us are ready to commit with full abandon....and all our cash....to far-reaching
forecasts for improvement in the economy.... or our collective attitude about
it. Understood. But the next few quarters, assuming
geopolitical exogenous noise (terrorism, e.g.) is not too extreme, might be the
catalyst for building up those expectations.
That
having been said, my proprietary integers are suggesting that the markets might
continue a short-term pattern of advance/sell-off for the foreseeable future
while it works out leadership and sector rotation themes for the coming year. This
pattern does not rule out prudent evaluation and stock purchasing,
however. We are still finding sector strength in
Utilities, Financials, and Technology, with specific opportunities in water
power generation, filtration, and commercial uses; regional borrowing/lending;
and biotech research. With turmoil in the Mideast, we also can't rule out a
short-term recovery in the Energy space.
Above
all, maintaining a strict investment discipline...and having a little
patience...is key to surviving end-of-year unpredictability.
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