Market Commentary for the week of December 14, 2015

Focus
The likelihood that the Federal Reserve will soon begin to raise short-term interest rates has created a psychological and fiscal schizophrenia that intensified to the max by the US stock market last week.  While it's not unusual now to see 200 point swings in the Dow Jones average, it is highly divisive when that magnitude of change occurs intra-day as it did several times last week.  While one obviously cannot say with certainty what might occur with future market conduct, our research has uncovered quite an interesting parallel to previous Federal Reserve "inflection" moments.  We have observed, for example, that more than a dozen times in the last 50 years the Fed was faced with secular "tightening" circumstances and in each case the stock market had an annual gain  after the rate increase.  In fact, in the ensuing two years post-rise the markets continued their rallies.

Intuitively, one might infer that borrowing rates only rise as a result of increasing and sustainable economic activity.  It's not easy being predictors of monetary policy, in general, nor Federal Reserve-watchers, in particular.  However, cyclical patterns in interest rates are almost always accurate in predicting the trend of economic and monetary movement.  Following the recession of 2008-2009, and with the benefit of austerity measures that seem finally to be bearing fruit,  it would only make sense that we are now experiencing a reversal in the cycle pattern, evolving finally from low to high, from economic crisis to economic recovery.

Clearly, a change like the one being forecast affects many segments of the economy in different ways, at different times.  Not all asset classes (bonds, stocks, cash, tangibles, e.g.) move with synchronicity.  Sometimes one category is going up while another might be in decline. Our clients know, for example, that we manage portfolios as earnings-driven asset allocators, diversifying amongst both sectors and specific equities.  In the realm of probability sciences, everything is measured on a parabolic scale....left side, right side, up, down.  Somewhere on this paradigm one can locate any financial security.  The key to our proprietary quantitative database is that we succeed better than most at measuring the magnitude(height) and amplitude(duration) of existing and prospective trends, and to use that data to help shape a portfolio allocation which best narrates to each client's risk/reward tolerances.  In fact, I believe that asset allocation plays a greater role in the probability of portfolio capital gains than does any individual security within that portfolio.

Given the framework of that discipline, we see positive long term implications for technology, alternative and renewable energy, biotech and biopharmaceuticals, infrastructure, and consumer non-cyclical equities, particularly agriculture and water-related companies.  Each of these investment segments is likely to build earnings momentum, price performance and relative strength, according to our metrics, for the next decade and beyond.

With the recession recovery already in its sixth year, we would urge short-term caution, however.  There are simply too many exogenous news-driven phenomena that could derail the market's traction for us to view this moment, this seminal juncture as the "right time" to go all in.   That having been said, knowing that a rate increase is in the offing, we view this cyclical "tectonic" monetary change as an overall positive for the economy and the stock market.

Big blue marble

Beyond the scope of the financial markets, however, there are other things to consider when making our macro assessments.  As the economy "improves", we have to bear in mind that not everyone feels the positive social or financial impact of those gradual transformations.  Part of Wall Street's problem is that it is frequented by a smaller and smaller percentage of the population than in the previous two generations.  With the middle class shrinking, the stock markets are perceived as a plaything for the already-wealthy, rather than the vehicle for achieving aspirations to creating wealth.  As the negative rhetoric and financial displacements exacerbate here and abroad, so too does the perception by many that they are becoming, if not already, disenfranchised from the political, financial, and social fabric.

The markets could use a hero...someone or something that inspires confidence about sustainable themes for the long-term; that which decouples our emotions from day-to-day concerns about oil prices, politics, terrorism, monetary policy, commodities deflation, our children's welfare, our portfolio net worth......and which focuses, in their stead, upon an overarching unifying social calling.

Unfortunately, "Heroes"  is not a category in our financial database, nor easy to dial up on demand.

Market Commentary for the week of December 7, 2015

You go that way....
Last week offered up yet another example of how a divergence in monetary policy between the Federal Reserve (US) and the ECB (Europe) causes grating swings in financial market activity.  Unsure of exactly which policy trumps the other, investors first drove stocks up....based upon "good" economic news... then took away all momentum by selling out just as violently.  Finally, once the dust settled, they bid prices up once again!!  A trader's schizophrenia has set in with each news announcement.  In layman's parlance, "easy money" desired by the European Central Bank would create the liquidity that supports growth and investment; regulating the buoyant state of the US economy, however, probably means a rate increase after seven years of near-zero interest.

Curiously, there are as many elements to revitalization policies as there are locations and regions from which to transact them.  Each continent has its advocates who argue forcefully for abiding principles that make currency stronger, jobs more abundant, and investment opportunity more sustainable.  It is, of course, impossible to have a "one size fits all"  global monetary standard.

Yet, confusion about what the ultimate outcome might be jostles stock markets with uncomfortable frequency.  Here in the US, observers expect employment to continue expanding, productivity to maintain acceleration, and output (GDP) to increase.  Abroad, the same pundits see declining output, shrinking employment, and market weakness.  Thus, stock markets recoil daily...hourly...from the confusion.

As rates rise from their nadir here, and shrink towards their nadir overseas, investors are faced with the possibility that economic imbalances might forestall growth in both regions.  Major European banks are already proclaiming that stimulus from ECB capital infusion might take two years or more to gain traction.  China, too, is looking to support its economy with monetary manipulations because it is forecasted that their domestic growth might be at its slowest pace in a quarter-century.

I'll go this way...

And still, even though the trajectory for US interest rates will soon probably be going higher, deflation  pressures are highest in commodities and energy, and likely to spread into other asset classes.  There is still considerable consternation about the effectiveness of raising interest rates at this time.

This observer would argue that at its best, previous disciplines designed to create (artificially) low interest rates have simply "maintained" a buttress to potential economic pitfalls, while propelling stock market valuations up to unnecessarily inflated levels.  At worst,  low rates have caused a flow of funds into asset classes that should have depreciated from the weight of their own insignificance or underperformance.  By making stocks the only game in town, monetary policy-makers have inverted the reward paradigm and forced many to take on too much risk.

Maintaining a stimulus bias to heighten trade and commercial interests compromised a delicate balance between nations, the result of which was to marginalize the competitiveness of the global trading platform.

All in all, I would contend that the manipulation of interest rates, currency, and capital has created a race backwards  rather than an

incentive-laden competition forwards which benefits investors.  A strict adherence to "austerity measures" post-recession has dampened the vibrancy of economic recovery by impeding higher, and more competitive interest rates, thereby depriving many investors a safe haven with maximum return for their cash reserves.

Too many asset classes have indiscriminately rallied because of low rate policies during the last five years.  It is interesting that low rates have historically reflected slow economic growth and financial weakness.....certainly not the situation we are in now.  At some point, it would seem, then, that we must reconcile what we know to be true about the economy and policies which stand in direct contradiction

Something is amiss.  Markets must find a direction...a theme....and stick with it.  Recovery, or no recovery?  For many, the data are simply unreliable and counter-intuitive to what they see in their own lives.  We must also be aware, however, that these variables can create additional volatility and hesitation in the financial market's daily activity.

Seemingly uncoordinated global economic monetary moves raise the potential for investors to lose patience, perspective, or hope.