Market Commentary for the week of June 20, 2016

Is the current volatility "good"?
With the markets roiling at the top, particularly following a seven year recovery and a recent 5 month price surge, one of the strongest emotions being felt by investors is that more volatility and uncertainty probably lies ahead.  That is mainly because investors have become fiscally and emotionally complacent when things are going well for them and practically apoplectic when things turn the other way.  Of course, while living on the edge of extremes is no way to carry on a money management practice, one can't always predict the exact moment  of capitulation...up or down...so we need always to prepare for either one, and sometimes both.  Ideally, my discipline is predicated upon preparation for either happenstance, and usually tuned-in to the myriad opportunities for capital gains that might seem hidden "beneath the talking points".

The current market correction has been swift and, indeed, problematic.  But it is not the first capitulation we have ever seen, nor will it be the last.  For the most part, it is causing us to elongate our forecast of optimistic returns, but not to abandon them altogether.  It's interesting to note that the Fed also said last week that they were lengthening their own timeline for redirecting monetary (interest rate) policy for the foreseeable future.

(Strategic note: as equities have declined in the past several weeks, we have also been opportune to place the proceeds of some profitable stock sales into short-duration bonds with above average yields-to-maturity.)

While overall bond yields remain low and in a state of perpetual uncertainty over the direction and intent of Federal Reserve policy, the equity markets remain, by default, the beneficiary of the market's confusion.  Let's face the fact that the equity recovery is long-in-the-tooth but still the only game in town.

I think it would be healthier to accept the volatility in stocks, rather than to bemoan it, and consider that an earnings and price-driven analysis is still one of the best methods for finding unrealized capital gains potential.

Sometimes, the contagion of panic selling and economic disappointment becomes a self-fulfilling prophecy which overshadows improving fundamentals and diminishing risk quotients.

Outside the margins

One of the main questions we have been asking during the sell-off is whether the damage is limited to one specific segment of the market, one particular geography, for example; or whether the panic is justifiably universal...all equities, all geographies, all categories, all capitalization spectrums?

Even though portfolio valuations have taken a (temporary) hit, we believe that improper overweighting and sector allocation might be accounting for the pullback, not a universal pandemic that is infecting all businesses worldwide, in similar magnitude.  At the end of the day we do not  believe that the global economy is going to fail, just that valuations got far ahead of themselves, and that projections for unrealistic expansion of earnings acceleration patterns and global growth got much too euphoric.

If we are, indeed, in for a soft patch, it should not be unexpected or unwelcome.  In fact, a correction in market valuation, portfolio appreciation rates, and economic forecasts for growth is beyond due, and might allow us to recalibrate the trajectory for market bourses worldwide into a more-normal axis.

We do not mean to diminish what have become common talking-points about risk: China, terrorism, monetary policy, global currency exchange rates, economic viability, domestic US politics, a devolution of social and moral imperatives....had enough??

There's no doubt that we are influenced by the media...what we hear and read...sometimes for the good, and sometimes to our own detriment.  Maybe, however, we should focus upon an undercurrent of long-term, redundant socially responsible needs and opportunities that truly define what it means to be an investor...to make a capital commitment outside the bounds of "conventional wisdom", from which discovery and opportunity are usually less affected by headlines, rumor, panic, and hyperbole.