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 Last week was a telling example of how the demise of relative strength integers superseded the announcement of any good economic news, and taking the market along for a bumpy ride.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.
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