Market Commentary for the week of May 23, 2016

Remember when?
Throughout our lives, certain mileposts and seminal events have defined where we were, how we felt, our attitudes and prospects about the future.  Remember the moon landing, the Civil Rights movement, the Vietnam and Iraq wars, the dot.com crash, or the recent credit crisis/global recession?

Today, some pundits are identifying the current post-recession period as yet another inflection point in our lives.  By referencing interest rate policy, energy prices, domestic politics, global demographics, and the technological revolution, they create hypotheses and scenarios, drawing conclusions about a decline in opportunity and sustainable economic endeavors.  Their thesis is designed to corroborate a sense of a demise in morality, compassion, and ethics.  One gets the sense that the accrual of all these data confirms their pessimistic forecast.

To be sure, the compilation of any and all data is significant to effective forecasting.  However, when the data itself is massaged into substantiating a hypothesis, then perhaps the assumptions going in might be influenced by the questions asked, the method of analysis, or the strategist doing the prognosticating.  The above statistics are being used currently to affirm a "grumpy" and "reluctant" populace, and while several indices regarding consumer behavior might in fact be slowing, the trend line has been responding favorably from whence it came.

Subtly persistent

We, too, acknowledge the unwillingness of the consumer to dispose of discretionary cash indiscriminately.  But there are other indicators which might refute its impact upon overall economic trends.

First, employment and wage data have been improving steadily.  And while "inflation" might be the next bogey-man to inhabit our collective psyche, conservative investing and savings rates have also been expanding.  Without a doubt, we still feel inhibited by the effects of the recession, but patterns of change are paving the way for future development.

Those unseen factors which might flip "uncertainty"  and "unhappiness"  into "euphoria"  are elusive, but out there.  Whether the economy leads the consumer, or the consumer leads the economy is the great unknown at this point.

We note, for example, that workers are changing jobs more easily, and usually for better pay, during the last 5 months.  While this statistic alone does not substantiate nor foretell a trend in spending, the notion of upward job mobility  might potentially loosen the purse strings at some point in the future in tandem with other economic factors gaining trajectory.

Additionally, there are sectors within the global economy that are relatively immune to recession, in fact emboldened by the hardship of others, like agriculture, medical and pharmaceutical sciences, alternative energy, ecology, and water-related technologies.  For every "right side" of the downward parabolic curve, there is a "left side" rising...sometimes in stealth fashion.  My research finds no shortage of social and capital gains opportunities from which to profit and/or provide for the common good.

Quantitative analysis does not create the trends, it measures  them.  Current systemic patterns (financial markets, consumer confidence, employment and wages, global economic output) are rising, albeit modestly, and on a very shallow axis.  However, this is a dramatic shift from the recession period during which all of these data were in decline.  Whether one defines the current condition as early stage growth  or latter phase decline  is subject to debate...and uniquely characterized by one's timeline of perception and method of analysis.  But compressing the data to fit one's biases is putting the cart before the horse.  Is today's marketplace a defining seminal moment, or simply a way-station on the road to some other outcome?

Without question, we are in the midst of a dramatic and difficult transition from recession to growth, which is further exacerbated by the unusually extreme and vigorous angle of ascent of stock valuations during the past few years.  So whether others define this period as the apex of the recovery, or simply another upside/downside inflection point on the way to somewhere else, we choose not to forget to look back and remember how bad it really was...and the positive prospect for what lies ahead.

Market Commentary for the week of May 9, 2016

Rediscovering macroeconomics
In last week's commentary we suggested that monetary policy, alone, could not assuage market concerns nor "drive the engine" that stimulates economic growth without assistance.  In fact, the political (fiscal) stalemate in Washington, D.C. has done enough damage to consumer's confidence that even the mightiest Fed proclamation might not be sufficient to produce empirical "happiness".  Last week was a telling example of how the demise of relative strength integers superseded the announcement of any good economic news, and taking the market along for a bumpy ride.

The markets need an infusion of political vision, resonant fiscal policies, and moral direction.

There is so much skepticism in the minds of people right now that even a steady flow of affirmative economic good news during the past 8 years has not been sufficient to melt away lingering doubts about "who's on my side", and "what do these numbers mean for me?"

No matter the multiplier effect of years of recovery, personal satisfaction always boils down to kitchen table economics.

Don't scare people

There will constantly be fluctuations in market direction.....that is a given.  In fact, market cyclicality is the predicate for our quantitative science's existence.  Consider, for example, that as the stock and bond markets swooned in January of this year, we counseled clients not to panic, and about a leveling off in stochastic (relative strength) risks, as we took measures to search for value amongst strong earnings' companies that had regressed back towards secular price support points.  Today, we caution against complacency, and are net profit-takers within the short (2 month) cyclical advance that we believe is nearing exhaustion.

All of this might seem extremely short-sighted, but bear in mind that while the overall trajectory of the markets remains positive (bottom left to top right), there will be cycle inflections along the path which measure as "too extreme", up or down.  Those are the moments we use to advise for or against risk-taking.

Unlike those who might use a specific date on the calendar, or a Fed announcement, or a particular earnings report as the basis of their evaluation, we use time  as the primary determinant for pulse, magnitude, and amplitude for our analytics and asset allocation modeling.

Both monetary policy and fiscal policy present significant impediments to market performance in the short-term.  Overall, the biggest mistake investors might make is to conflate either of those two with the secular trajectory of macroeconomic indices.  Investors made that same blunder before the dot.com debacle and, again, before the most recent credit recession.  We previously coined the phrase "parallel disconnect"  as a metaphor for two events which, seemingly move in tandem, but which might not be related at all as expected.  Investment cycles are not indelible, nor are they incapable of failure.  Quantitative analysis is the most efficient tool I know for forecasting "fatigue points" within the broader trend, and for avoiding the pitfalls of staying too long "at the dance".

Within this scenario, however, we must also have clarity from our politicians.  Gridlock and political posturing only elongate the timeline of our analytical processes by effecting artificial twists and turns to the natural evolution of things.  If the primary goal of quantitative studies is to measure the trends, then the ideal goal of political discourse would be to initiate and perpetuate those factors and trends which deliver the optimal outcome for market constituents.

Studies abound about statistics and measurements.  But very little evidence catalogues the key to unlocking the most efficient political systems for distribution of wealth and opportunity.  Scientists don't make policy, but they can impute value and consequences to political decisions.  The "happy medium" between science and political responsibility is ultimately the trade-off we should be striving to achieve.

Market Commentary for the week of May 2, 2016

A little of this...
The quick and decisive pullback in stocks last mid-week was hardly unexpected.  As we wrote previously, we would not have been surprised... and felt the Relative Strength Integers (RSI) were suggesting.....that a correction was due at the conclusion of consecutive weeks of intense buying.  Several sectors have run significantly in the last month, making it a distinct possibility that earnings expansion this season won't keep pace with price acceleration. As earnings-driven investors, we are always attuned to the velocity of or changes in the bottom-line potential of publicly traded companies.  Despite low interest rates and a lack of suitable investment alternatives to stocks, we still cannot foresee "straight line" (linear) price movement in stocks indefinitely.

On the subject of rates, however, we do believe that there must ultimately be homage to an improving US and global economy through upward interest rate machinations by the Federal Reserve and other global central banks.  Quantitative easing in nations like Japan and Italy has not yet produced a desired economic stimulus.  Those models will probably be altered if the outcomes don't improve.

The main problem in 2016 with a protracted policy of easing borrowing expenses is that the policy itself has not produced the empirical results observers had expected.  While we do acknowledge that cash infusion definitely averted an economic calamity at the beginning of the recession (2008-2009), the effect of maintaining such a bias in the middle of this recovery has created other, inadvertent consequences, not the least of which is failing to give savers and responsible investors a fair return on their cash deposits.

Additionally, global governments have been "toying around the edges" with their own monetary policy by using rate cuts to create trade advantages against other nations by devaluing their currencies in hopes of stimulating demand for their products.  This "race to the bottom" of the yield curve produces very few winners in the end.

So, while global stock markets rally from the effects of austerity and quantitative easing, the net result is slower activity and a harvest of potentially weaker earnings data.  We see a major reassessment of asset prices in the offing.  There is no need for the Federal Reserve to continue playing with emergency measures targeted at inflation and unemployment.  It would go a long way, and deliver a powerful message of confidence, if the Fed raised rates sooner rather than later.

A little of that....

It is curious, also, that the Fed signaled bullishness about the US economy when, last December, they actually did move to change interest rate policy.  In the past few weeks, earnings reports have been indicating "slacking" profit acceleration, even though well above recession lows.  Increasing wage levels are good for employees, moderately painful to the corporate bottom line.  I'm sure the Fed will keep a close eye on labor and employment data to maintain a balance between cost expansion and net revenue growth.

Continuing volatility in oil prices has hurt the energy complex, as well as the banks and investors who lend to them.  As production and capacity expanded during the recovery, prices for the commodity had fallen to generational nadirs.  Almost as quickly, prices at the pump have recently begun an upward trajectory.  The year ahead probably offers more of the same back-and-forth.  The risk of deflation/inflation in energy, and other commodities, is yet another barrier to the markets' capital gains potential.

There are other, less obvious risks to market expansion, such as terrorism, domestic politics, war, or any other geopolitical event which might negatively exacerbate consumer confidence or consumer's financial discomfort.  Our point is that there are always two sides to every story...in this case bull or bear....and there is ample justification for one point of view, the other, or just resolute ambiguity.

As we lurch towards the midpoint of this quarter, we feel the greatest risk to financial assets is not necessarily what can be described in a textbook or by financial  or economic  language, but in the potential for consumer's psychological vitality simply to dissipate, like an ember fading away.

Slow deaths might be less dramatic, but are nonetheless just as painful.