Overall,
investor anxiety about stocks is intensifying.
There appears to be strong momentum in the wake of the Brexit vote to "dump everything", to get out
of the way of a snowball rolling downhill.
What might have been a "normal" response, a more measured tightening
of share prices within a cycle decline, has turned into a catastrophe for some,
resulting in a total state of disequilibrium.
However,
amongst the variables that changed last quarter, last week, for the financial
markets, only investor perception and
confidence exaggerated the downward
velocity of the sell-off with any degree of conviction. The facts of the economy remain relatively
the same as the week before.
Despite
astonishing monetary and fiscal efforts that elevated us out of the recession,
financial global bourses have become a victim of their own pecuniary
success. They became too expensive, too
speculative to sustain those five-year highs...Brexit or not.
Add
to this mix the upcoming US Presidential election, and you concoct a host of
unknowns that everyone is pointing towards to justify a "sell" bias.
Thus
far, however, I see no particular data which lead me to change our perspective
about secular trends, earnings patterns, sector weightings, or moral
imperatives. Our expectations for a sturdy-but-slow climb
from recession-driven lows outweigh any sense of panic. We are not going to be oblivious to the impending
obstacles in front of us (terrorism, regional discord, economic uncertainty,
etc) but, equally so, we are not going
to punish ourselves for an optimistic, glass-half-full orientation, either.
Markets
The
markets are being held hostage by financial uncertainty that trails the Brexit
decision. But, as alluded to above, we
do not see a direct correlation between those fears and fundamental or
quantitative analysis of the investment
landscape. It is not the stock market
that governs our everyday lives, it is economic kitchen-table facts and our
social customs. One's children's
education, plentiful food and water, our jobs and hobbies, physical surroundings,
health and well-being are those ethereal factors whose "happiness
quotient" hopefully does not equate to the Brexit vote in a straight line,
nor which determine our personal
Price/Earnings ratio. While the cost
of "things" changes constantly, our personal quotients are more
grounded, and do not rise and fall with the Dow Jones Industrial Average...nor
should they.
Brexit
produced a classic psychological dislocation in which "what is" and
"what it feels like" tilted our collective psyche so much that
we lurched either towards panic or
inertia, debilitating the normal order of things. The debate about what comes next is
important, but the search for personal and market equilibrium is much more
difficult to accomplish. Two bogeys in the first three holes does not constitute the whole story, nor is it
an accurate depiction of the final score.
However, for many of us in this particular instance, it seems like the
tail is wagging the dog.
Unfortunately,
a relatively low global interest rate scenario has made stocks the only game in
town. But despite the inherent risks of
owning equities we still see opportunity in biotech, healthcare and life
sciences, alternative energy, infrastructure, agribusiness, and utilities. We are also keen on maximizing our interest
in our Water Stock concept as a socially responsible tool for generating both
conversation and profit from an issue that has generational significance.
My
recurrent readers might recall that we had identified several factors in the
past few months that might have predicted just such a manic, right-side-of-the -parabola reaction in the stock markets. Depending upon the magnitude of the decline
in valuation in the coming weeks, we know that the timeline of recovery has
definitely been elongated by several standard deviations. Only when we look back might we fully
understand the severity...and reasons...for the market's Brexit capitulation.
However, it will not only be by the magnitude of the financial market's
decline that we will measure the fallout, but by any changes that take place in
consumer sentiment, spending, and behavior.
Nearly
everyone is captivated by the outcome of the Brexit vote, but for a variety of
different reasons.....
Most
notably for the amazement that many feel by the duration of the equity markets'
remarkable 8 year recovery, and disgust with no appreciable effect upon their
own financial circumstance. This is a
tale of the divide between the rich and poor, one which widens with each
quarterly earnings season. Now that the
vote is over, pundits are left to digest this phenomenon that is taking root
all over the globe. Fears of a
"domino effect" from other nations are worrisome. But I would quickly add that wherever
citizens go to bed hungry, dislocated, impoverished, and without hope, Brexit
is the last thing on their minds.
To
be sure, this is a complicated, multi-tiered political/financial issue. Free trade, globalization, currency exchange,
and multi-cultural integration are factors that affect us all...even the
impoverished and disinterested. But
"who wins" and "who loses" cannot be determined today,
and will take time to evaluate. As is
its custom, the financial market is positioning for trading advantage during
this time of crisis, leaving in abeyance other real-life issues that have
little to do with "the Street".
This
is why citizens turn off to the machinations of Wall Street to focus instead
upon what matters to them with immediacy.
All
those trillions of dollars...and Euros....tied up by the Brexit uncertainty are
being left unproductive while market-makers see how/when they gain clarity
again. The fallout from the debate has
already begun. Sudden swings in
valuations always produce ups and downs, winners and losers...and, of course,
tremendous volatility. Moreover, the
anger that many feel about the disparity between "the haves" and "the have-nots" becomes a potent political weapon not to be
dismissed.
Even
amongst those who keep an even keel about such things, emotions are running raw
and powerfully. It is incumbent on those
in the business of money management and finance, for example, to lead with a
steady hand, using methodology and discipline...not emotion...to guide their
clients. Complex tasks sometimes must be
broken down into smaller steps.
Evaluating one's overall asset allocation and risk tolerances is an
excellent way to mitigate any potential financial or emotional damage. As you will see below, we are taking a more
cautious approach this quarter with our overall balanced asset allocation,
believing that bargains are to be had, but security of principal outweighs any
desire to go bargain hunting.
Conclusion
Distrust
of our political and social institutions everywhere around the globe cannot be
overstated. The debate is raging with
good reason. Consequences be damned,
citizens are resolved to gaining equal access to their personal pot-of-gold. This is the social and economic movement that
created the underpinnings for Brexit to occur.
These
issues of fairness and access are not easy to grapple with. The same sense of unease and mistrust inhabits
rich and poor alike, just in different ways.
While the visuals are sometimes different, the grievances are interestingly
quite common. By and large, human beings
crave certainty, comfort, and security. Despite geography, age, race, or wealth,
those are life's most powerful forces.
Psychologists
and sociologists agree that there are more emotions and features that unite
people than which divide them. Both Wall
Street and Main Street can play a role in governing the shifts that are
inevitably going to occur. More
importantly, our leaders should demonstrate a willingness to coalesce around
common goals and socially responsible solutions to real life problems. That would be a powerful rejoinder to the
anxiety of Brexit for future stories to be told.
Suggested
Balanced Account Asset Allocation, Q3, 2016
Equities: 50%
Fixed Income: 20%
Cash: 30%
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