It was just a few weeks ago when the Dow Jones Industrial Average went on a tear. The index saw a large part of its annual percentage gain occur during a very brief post-election run. "Prosperity for all", or so it seemed, was just around the corner and obviously preordained for unending duration....
Yet
now, just a brief time later, those sobering questions of recovery or reversal are resolutely back into our analytical
lexicon.
Many
who watch the market's activity today are reminded of another period in the
nation's history, almost a century ago, in which comparisons to another
post-recession period of retreating stimulus and anti free-trade speech thrust
the business community into consternation and a spiral to survive.
As
a result, there are those who wait alarmingly for the historical mimicry and to
see what emerges from this next session of Congress, and whether their fiscal
policy proposals really do attempt to create change for the US economy.
Conversation
and debate do not result in simultaneous change, however. Because there is a lag in time between
proposals and law-signing, the real "value" to be found in all this
preamble lies in the reactions (and actions) by businesses and households to
what they perceive they hear.
We, of course, know what the politicians want to do, we just don't
know yet in what form it will take and how the general population will feel
about it. Basically, all the financial
and business-related information we knew and had three months ago is still the
same: conditions are improving, but very slowly and not at the same rate for
everyone. Simply tossing aside that data
to create a "new mandate" is narcissistic and unnecessary. Just because there are political and
jingoistic concerns about fairness in global trade does not mean the nation
should hunker down and withdraw.
Washington must choose whether to reign in domestic spending or to
accelerate it.
The
new "new reality"
The
problem with all this conjecture is that the stock market now no longer seems
to be an accurate barometer, or arbiter, of what's happening in the same way analysts
perceived its accuracy for doing so last year.
Valuations can certainly be helpful when analyzing trend lines, but
whether or not stocks represent the "best snapshot" of America's
current economic condition is up for debate.
Of
course, all data are relevant. We choose to be invested on behalf of our
clients across an array of sectors and probability quotients. But we also recognize that the market is
lagging those indicators.... more so than last year.... because the political
debate is much further out in front of the news, and because stocks are at accelerated
price levels at which the winners and losers are less able to be delineated
than when trading at the nadir of valuations.
Yes, the market is going in the "right direction". But as I wrote last week, right and left/up
and down are not definitional certainties anymore.
Despite
all that, any potential slippage in valuations from here would most likely be a
temporary thing. As noted above, the
data are improving, so it would be quite difficult to stop economic momentum on
a dime or by fiat alone....although there might be enough hubris amongst our
legislators to give it a try (?) Even at
record levels, stocks are still fairly priced because the social and financial indicators
are still trending well ahead of current equity price performance.
Despite
the convulsiveness that might lie ahead for the financial markets in the next
few weeks and months, there are still a number of requirements that have to be
filled by the private and public capital markets arena. Looking at the macro picture, we would
suggest that research, ingenuity, and financial resources have not yet
scratched the surface of potential to improve the human condition. This is why we still see secular potential
from a number of sectors.
Besides,
if government is not the answer to the problem, then it must be part of
the problem.......correct?
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