It's common wisdom in this era of shifting political and social attitudes that the financial market's post-recession boom has been a blessing for some, non-existent for others. So it's natural to also ask, “is the recovery ending or just really beginning?"
We
accept that our institutions have our best interest as their goal. But those who are questioning the validity of
economic progress in the past 10 years might question whether that reality is
pervasive. For example, a big debate on
Wall Street is about the effectiveness of Federal Reserve and other global
central banks' monetary policy as it relates to whether or not low interest
rates have achieved the desired inspirational effect. What
we know for certain is that monetary policy and low interest rates have
definitely had a direct, and causal, impact upon the magnitude and duration of
the stock market's recovery bounce. Few
can deny a direct correlation between the S&P (up) and the inverse
direction of borrowing costs.
Therefore,
it is fair to ask whether the Fed made our economic situation better or worse
as a result of their austerity-then-accommodative policies?
Based
upon my quantitative algorithmic studies, I can attribute at least 25-30% of
the market's recovery rate of return in the past half-decade to low interest
rates. Ironic, since the financial
markets had nowhere to go but up immediately following the global credit
crisis, anyway.
However,
the pervasiveness of low-cost borrowing allowed corporations to use excess
capital (whichever had excess capital!!) for share repurchasing and direct
internal expenditures rather than investing in employing new personnel,
R&D, or external work projects.
Outsized
returns in all stocks exceeded historical post-recession
numbers, thus widening the breadth of participation from just a few successful
categories to nearly every stock in the database. However, by making the universe of positive
growth stocks bigger, the Fed inadvertently widened the breach between those
who did well in the markets and those who pulled out of the market in fear of
future capitulation.
Follow
the non-leaders
By
definition, trends depict long term historical patterns and
configurations. By creating no
statistically different signature from one company to any other, the
distinction between those companies, those industries, that would ordinarily
flourish or perish in a post-recession climate was essentially obliterated by
monetary policy.
For
investors today who find themselves at the apex of portfolio valuation from the
2008 decline, concern about continued acceleration in earnings and stock
performance is uppermost in their minds.
"Should I buy more now, or
sell and lock in gains?" Our
advice has been to become more sector specific and less diversified than simply
buying an index fund which parallels the market's potential gain and/or
volatility. Only through careful due
diligence and prudent asset allocation can a portfolio's true sustainable alpha
be achieved. We are focusing upon strong
thematic trends in water, food, energy,
ecology, infrastructure, and biopharmaceutical
research as good places from which
to eliminate the exogenous noise of day-to-day, news-driven volatility.
It
will very interesting to see how the values in certain businesses either keep
pace with improving economic data, or begin to whither under the pressure of
selling to Main Street and a very demanding consumer. Even though there has been progress in the
rate of economic growth, globally and domestically, the composite picture is
always measured against the backdrop of consumer
confidence, consumer spending,
and discretionary wealth. What we have witnessed thus far is a general
reluctance on the part of the public rapidly to buy-in to the data, unless they
personally feel as if the comparisons relate to their situation. Thus, better economic data, but poor numbers
on consumer buy-in.
The
theory that low interest rates and available credit galvanize corporations and
the public to spend more money fixing the economy has, at least on this
occasion, proven not to be true.
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