The
stock market's period of docile waves during the summer was rudely interrupted last
week by convergence of poor economic data and the change of seasons. Most global averages vacillated anywhere between
two percentage points up, all the way in the other direction to two percentage
points down, which differed significantly from a gentle summer during which
there were no days with percentage gains or losses of greater than one percent.
Most
attribute the volatility to perceptions that consumer demand is waning and that
the Federal Reserve is sending unnecessarily mixed messages through its emissaries
about their intentions to raise interest rates at their scheduled meeting this
week. The shockwaves caused by the
trading volatility once again has investors worrying about "losing
everything" after a few months of benign neglect and significant profits.
Additionally,
energy prices are confounding the experts.
Even though the cost "at the pump" is relatively inexpensive
for customers, those same prices are keeping suppliers from producing more
product because profits are simply not strong enough to justify doing so. Thus, oil reserves are perceived to be depleting,
while economic forecasts are reflecting a negative sentiment about growth and
economic sustainability.
Wall
Street's impractical obsession with 24 hour news cycles, in the meantime, only
helps to exacerbate the intensity of trading volatility.
Patterns
of change
Where
is it written that a bull cycle doesn't allow for daily current events, or a tolerance
for differing opinions?
Our
conclusion when looking at the trend line of economic data is that the progress
achieved by the financial markets during the past half-decade has been
considerable and durable. Owing to a
protracted period of lower inflation and low interest rates, consumer
confidence and consumption has gradually evolved in certain sectors from
"zero" to robust. Although
these patterns might certainly abate somewhat because of their duration and
magnitude, there are other factors to consider before one simply throws the
baby out with the bath water.
We,
too, are aware of the imbalances in the accomplishments of the recovery
particularly as it relates to job creation and wage growth. But that sense of uncertainty is tempered by
specific sector optimism in areas like biotechnology, pharmaceutical research,
agriculture, infrastructure, and consumer durables. What we call the "imbalanced imperfect equilibrium” might skew the rate of market performance in
the short term, but does little to quell a subtle groundswell of positive change
taking shape for specific demographic silos.
Sensing
the inevitability of higher interest rates, we see opportunity in a market that
has thus far underperformed in its breadth of prospects. The emergence of small cap opportunity and increased
activity in capital markets' private placements represent the seed money that
gives rise to innovation and new product demand. Higher interest rates also create an
alternative investment option for those too fearful of the risks inherent in
equity ownership, alone. The potential
for runaway inflation is virtually non-existent as long as our trustees hold
the line on excessive spending and/or the creation of fabricated leveraged
return products.
The
US Presidential election, now two months away, will send an interesting message
to the rest of the world about America's willingness to set aside...or
not....internal political differences and to assume the moral, political, and
financial high ground on behalf of its citizens. "Out of many, one"
(e pluribus unum), is the nation's motto.
Let's see if our legislators have the gumption to make that happen.
All in all, we expect the general tone of the markets to continue being disorderly as the year concludes. However, we also believe that the overall market trend, from bottom-left to top-right, will endure well into next year.
(Our
next publication will be our Quarterly Market Outlook, published on October 1,
2016)
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