Market Commentary for the week of August 8, 2016

Straight up
Be honest.  Did you really believe that the stock market would continue to go "straight up" after making a series of new highs during the past several weeks?  If so, you probably have extremely misplaced hopes and a great deal of inexperience as an investor.

As a statistician, I find my greatest  levels of anxiety at market peaks...probably just the opposite of you.  You see, in this eccentric world of mathematical probabilities and inverse correlations, the odds of "bad" things happening increases as more "good" things occur.  Strange as it might seem, the market's best odds...and yours as an investor....heighten as we approach the nadir, and decrease as we approach the apex.  Such is the nature of quantitative statistics. 

Thus, it's not surprising that last week's excess of negative news about retail spending, oil production gluts, and consumer confidence helped to crystallize, once again, the risks that many feel about the markets at these lofty levels.  As we have written repeatedly, consumer spending is simply not robust or consistent enough to support price multiples and earnings projections for common stock for an extended period.  The balance of this year looks to be a blindfolded game of finding unique "needles in haystacks"  within the broader global marketplace, affecting the probabilities of portfolio performance and investor satisfaction.

Better mousetrap

And yet, despite a deceleration in earnings patterns, the possibility of discovering outstanding undertakings on the cutting edge of new technology, thought, and innovation is extraordinarily good.  After all, isn't that the nature of and purpose of investing in the first place:

to commit your capital, as a stakeholder, to companies, ideas, and people who produce that "better mousetrap", offering value to their communities, for which you, the "owner" reap a profit?

I also urge caution when ascribing too big a meaning to the current stock market pullback.

Although the rate of ascent might have slowed down because of last week's selling, we are a long way from reversing the bullish course of the recovery.  Markets ebb and flow constantly, sometimes on a straight line, sometimes curved on an arc.  Acknowledging that fact is the first step towards becoming a prudent investor.  But still, sometimes panics occur spontaneously.  Nevertheless, we remain in a tidy range within the current uptrend, and it's too early to throw in the towel completely because of one week's capitulation.

That is not to suggest that one should ignore apparent risks altogether.  I have said many times that the stock market and the economy, although seemingly inexorably linked, are not one and the same.  In fact, it is vexing that the market is inflating beyond nominal price boundaries only because there exist no suitable alternatives for client's money in the fixed income realm.  This sets up a false promise that stocks might continue to perform in spite of fundamentals being deficient in some cases.  Low interest rates have created a false equivalency in the stock market that at any given moment share prices always accurately reflect the underlying value of the company.  Once again, the better mousetrap theory is not always being observed, but it is from that thesis that one might ultimately find the best value for their investment capital for the long term.

As has already been the case for the duration of the post-credit-crisis recession/recovery, global central banks, including the US Federal Reserve, hold the wild card in much of what we anticipate will happen for the markets.  After reviewing headline news data, and then delving deeper into their meaning, one must assume that at some point in the near future regulators are more likely to withdraw from strict austerity measures and allow, albeit slowly, interest rates to float higher.  In turn, those decisions could put pressure on currencies to find and maintain exchange-rate equilibrium, as well as redefining commercial import/export relationships.  The taciturn reaction to last month's Brexit vote might just be the tip of a global iceberg waiting to set sail.

Unless or until the financial markets begin to reflect the needs of and solutions for a larger social, moral, and business construct, it's all about speculation and day-trading, as opposed to investing as we wish it should be.

The bigger issue, from our perspective, is whether or not current global bond yields reflect the real  economy, or rather how central banks wish  their economies to be perceived.  By helping their budgets to create profitability and sustainability, they also incur negative consequences by reigning in the natural order of things and raising awareness that each nation, individually, has been deficient of fiscal controls and innovative, socially progressive policies that deliver a sympathetic balance between banks and customers.