Having run for nearly three months, the US financial markets at some point will have to demonstrate vulnerability. It is the essence of cyclical phasing that nothing lasts indefinitely...at least without pause....and nothing lasts permanently when it exhibits linear upside momentum. I would like to point out that these immutable laws of physics and economic gravity are not being invoked to be "negative", but simply to point out methodological certainties that engender, at the very least, cause for concern.
As
with real life, the extent of earth's "gravitational pull" upon the
Dow, Nasdaq, and S&P depends mainly upon how well the trend can sustain in
the face of convoluted political discourse, economic ambiguity, and investor
fear amid concerns about cashing out while the getting is good.
A
useful analogy exists between aerodynamics in space travel and financial
momentum. Spaceship momentum is a
function of propulsion, science, and essentials that govern ignition and
physics. Assuming an exactitude within
aerodynamic sciences, we can predict the when,
why, and how of liftoff and orbit.
The financial markets similarly are governed by "laws" of economics with one significant difference. Precisely when, where, why, and how is more often correlated to investor interpretation and emotion about the data than the data itself. That is the "x-factor" that makes markets so unpredictable.
One
of the more frightening aspects of that last observation is how quickly selling
panics and buying manias can develop in financial markets. It might take months or years for trends to
unfold, but only one "spark" away from igniting a fire sale. That point is even more injurious when
markets inexplicably climb a straight line upwards.
Panics
occur unexpectedly. When the capital
source for buying stocks dries up, as has occurred on occasion in the past, frenzied
undercurrents erupt. Ironically, they may
take the form of subtle "distributions at the top" initially, or they
might modify into uninterrupted frightful selling. Etched in our memories, I'm sure, are
examples of the latter.
Simple
projections
It
is hardly a sure bet that the market can continue upwards, unabated, in linear
fashion. Although we will concede that
markets...and politics...have entered into uncharted territory, it is highly
unlikely that the "laws" about which we spoke earlier have been
rescinded.
Most
economic indicators continue to be positive and progressing at a steady pace
since the Great Recession of 2008, as the Fed Chair Yellen testified last
week. Other than an increasingly convulsive
rhetoric that punctuates Washington politics, there is an abundance of reason
to be optimistic about the economy.
Almost across the board, business has reconstituted under a new dynamic
that renders economic risks relatively low.
Despite any one-off insecurities that might punctuate financial
analysis, there is a growing catalog of opportunity in existing and yet-untapped
sectors. In particular, my work in
socially responsible investment categories (water, agriculture, infrastructure,
alternative energy, biopharmaceuticals, etc.) compliments our overarching macro
sector analysis. Our confidence about
economic development is high.
The
only variable which might impede our scenario going forward, however, is an increasing
polarity between the "rate" of growth predicted by economic forecasters
versus the "rate" of stock market valuation increases. They're not quite matching up equivalently,
creating what I call a parallel disconnect. That bubble is becoming problematic.
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