Market Commentary for the week of May 22, 2017

I'll tell you a secret...

It's hard for many to accept that when it comes to investing, consistency of methodology is the keenest way to build wealth.  Nobody knows for certain if the market will go up or down on any particular day.  The capricious news-driven decline in stocks last Wednesday certainly bears that out.  There was enough panic and concern to go around for everybody during, and in the aftermath of, cable news' 24 hour analysis of Washington DC political chaos.   While my team attempts as best as we can, we also don't know which stocks each day  will outperform or underperform, which sectors will advance and which will decline.

Market timing is simply guesswork, and I try to avoid guessing if at all possible.  The headlines on cable news and the internet don't help much either.  They serve, instead, as distractions to the very nature of fundamental long-term investing.

To avoid disasters like those one day calamities and other longer-term capitulations one needs to shelve the "macho" and focus upon the macro view, irrespective of exogenous noise or other siren songs.  Buying stocks and building diversification is not about distractions; it's about fundamentals and good business practices.  Companies that increase sales, develop innovative solutions to the predicament of the human condition, build market share and show accelerating bottom-line productivity year-over-year are typically the kind of data generators that qualify as high relative strength candidates in our portfolio-building process.

No matter what happens to the conventional "stock averages" each day, our focus is upon consistent leadership and overweighting those factors in our allocation models.

Reality or fantasy

Within my quantitative portfolio disciplines real, enduring portfolio gains are predominantly a factor of 4 important components: (1) time (2) asset allocation (3) a "sell" discipline (4) pricing power.

Is it really that simple?

Mostly.

As with everything else these days, conversation about the financial markets has become highly politicized.  Make no mistake, fiscal policy and political persuasion do play important roles in the near-term vector of market trajectory.  One might even extrapolate further by suggesting that their impact upon corporate governance, earnings creation, and capital expenditures plays a unique part in our analysis.  But, as pointed out earlier, one must be careful about inferring a direct correlation  between these micro daily events and the broader swath of the economy's path and, by implication, its impact upon your overall strategic risk/reward calculations regarding your personal net-worth.

The key is obviously to be fiscally responsible, allocate the proper weightings to these data, and to be nimble enough to deflect whatever obstacles might interfere with your financial objectives.

Principles of portfolio-building emanate out of rudiments and scientific method.  There are no shortcuts or high-risk gambits that pay off all the time.  It is nearly impossible on this single page to illuminate all the permutations that science imposes upon practical portfolio discipline.  But suffice it to say that wasting time looking for the "big score" is probably the most useless of your tasks if you wish seriously to succeed as a portfolio manager.  I have great empathy for the desire to do so, but very little sympathy.

More importantly, though, is to break the cycle of "betting it all on red”.

Managing risk is just like everything else in life: weighing the cost versus the benefit.  Unless you already have large sums to lose, it is not worth it to put all your eggs in one (biotech) basket.  And besides, even the wealthy allocate  a portion of their risk capital.  Very rarely do you hear of an ultra-rich entrepreneur betting his entire fortune on one golden opportunity.

Market fundamentals are not a secret.  They are known by amateur and professional alike and typically sourced from the same data resources.  What constitutes the difference is how those with a steadier discipline apply that data towards becoming better informed and more maneuverable at their craft.

Market Commentary for the week of May 15, 2017

Ground Hog Day

It's Monday.  That means there must be another new high in the stock averages.

Or maybe not, if retail earnings foretell another narrative.

Investors have grown so accustomed to a steady drumbeat of portfolio expansion that they have lost a bit of discrimination and analysis about their investment endeavors.  When seemingly "everything" just keeps appreciating in value the overwhelming instinct is to close one's eyes, not to question the good fortune, and to expect (with a modicum of apprehension) that the ride will continue.  That, in itself, tells me just about everything I need to know about this rally.

Don't get me wrong.  We are in the midst of a very healthy bull market, built on the foundation of several years' worth of superior data and corporate re-engineering.   Even if there were to be a capitulation in stock prices it wouldn't be significant enough to quash the prevailing economic trends.

But at some point short-cycle phases....those which comprise the day-to-day sequences of the longer term pattern....become overbought and candidates for expiration or rebalancing.  I bring this to your attention not to say "I told you so" before (or if) it were to occur.  No, it is worth noting because active  portfolio transitioning is a positive  attribute of building successful capital gains.  The arrival of dark storm clouds can be imputed by using scientific method in the same way that meteorologists correctly imply changes in the weather.

The key for portfolio managers is to be right more often than you're wrong, and particularly to be responsive to the data, as opposed to being ignorant of them...or worse, stubborn in one's beliefs.

The current short-term phase in stocks is well ahead of the longer term's ability to sustain capital gains at this existing rate of appreciation.

No matter what your biases, the relative strength rankings for the current short-term trend are approaching saturation levels.

Better

It is worth reaffirming that both the market and  the economy are doing better in the last 6-9 months, and have been anything but boring.  US GDP should draw closer in 2017 above 2%, which is much better than expectations were just a few years ago.  No matter how much one might wish for a pulsating blue warning light, there is no line of demarcation or signal that delineates the "olden days" from the "new".  Instead, economic progress is tectonic, like the shifting earth itself, but looks, only in hindsight, as if progress has been made.  Of course, while capital gains usually take years to develop, corrections are sometimes quicker, more manic, and mostly unexpected.

But not many of our data are calling for an immediate reversal of economic trends, simply a change in risk paradigms that by definition would usually occur over time.

Economic expansion must be propelled by private sector demand, and here is where our quantitative integers do foresee some problems ahead.  Last week's retail reports sow the seed of doubt about "loose spending" and discretionary consumer purchases.  You see, if stock price gains are linked solely to earnings expansion without commensurate upticks in top-line revenue growth, then the market has nowhere else to turn to bolster the accounting alchemy of the past half-decade.  Quarterly gains in productivity have mostly been driven by cost-cutting and technological advances.  We would prefer to see an acceleration in jobs growth coupled with wage expansion as the last successful peg in the puzzle to fall in place.

The stage is set for this summer either to be a dramatic acclamation of monetary and fiscal policies, or to be the battleground between shoddy financial mechanics and unintended consequences of consumer fear, ignorance, panic, and lost potential.

 

Market Commentary for the week of May 8, 2017

How much is enough?

It is quite fortuitous that the market is continuing to dole out "rewards" and still compelling investors to hop on board the runaway train.  For those who prefer a more conservative approach, simply waiting out an eventual contraction has been a particularly prosperous strategy.  And for the more aggressive trader, this market has similarly provided them with a functional opportunity to play every angle of good fortune.

But it's also necessary to poke a little deeper into the data and to uncover some graphic examples of systemic inequalities that permeate the entire global economic landscape, leading us to wonder at what cost is the financial windfall of the stock market affecting those less fortunate who have deeper concerns about hunger, poverty, security, and survival?

More simply, ask yourself (as you're counting up the gains in your monthly brokerage statement), "how many are going to bed tonight hungry, thirsty, disease-ridden, or destitute?"

Look, we're not trying to be too moralistic or punitive, but playing around in the stock market is a luxury very few of the globe's citizens can afford.  Last year, less than a third of the global population even owned stocks or bonds, while 0.1% of the entire planet's population owned over 23% of its wealth.  We doubt that those statistics are likely to change very much in the next decade.  Perhaps you might think on that as you're dancing for joy over that biotech stock that just hit a new 52 week high....

Billions

The enormous sums of money being won and lost in the financial markets are calculated in the billions and trillions of dollars.  Investor's risk appetites seemingly have no end.  Decisive upticks in stocks over the past few years have made the wealthy wealthier, while bringing the pedestrian middle class portfolio along for the ride as well.  But think about the fact that markets are usually parabolic shaped.  To suppose that "it can't happen to me" is extremely short-sighted...and ill advised.  Despite how rich investors are becoming, there are always pitfalls along the path.

I am also very worried about the advice that customers are receiving from a variety of financial resources.  In a bull market like this one, everything  is going up.  What happens when that propulsion stops?  Where do you go from there?  Cash out? Rebalance? Hope?  Pre-packaged advice and homogenized products unfortunately won't supply the answers, nor will they necessarily give you the right guidance related to your own risk/reward tolerances.  As we approach, and breach, new highs these are the concerns I hear most often from clients and prospects.

Since last November, selected stock markets have appreciated nearly 20%.  A handful of fortunate stakeholders have made out very well.  Even the US Federal Reserve stated as recently as last week that all seems right with the direction of the US and global economies.  But realistically, all economics are local. There are only so many new cars to be bought, or new clothes to fit in our closet.   Crowded restaurants in midtown Manhattan might be empty diners in rural Midwest.  Surging biotech campuses in Oregon are offset by quiet factories in Pennsylvania.  Crowded ski resorts in Gstaad stand in contrast to slums in Delhi.  It's all relative.   

Which is why I lament the fact that there is a lack of synchronicity regarding how and where the wealth is being created and disseminated.  At an alarming rate, the rich are getting richer.  However, the poor are not getting wealthier, nor is the "middle class" accreting its wealth at the same rate as the well-to-do.  It seems as if the wealthy always have a leg-up on the rest of us...and a bigger cushion upon which to rely when times get bad.  Good on them.  But morals and principles of what it means to be a member of the human race don't always equate to the size of one's pocketbook.

And if it's all about economics for you (not global poverty), then financial headwinds, razor thin profit margins, war and regional conflict over precious natural resources can hardly be good for your portfolio in the long run.

How long the stock market recovery lasts is an art form to predict, and an unknown for sure.  However, what is not  unknown is the plight of the less fortunate in this world.  Sadly, upticks and downticks in the stock market today have very little meaning to those whose only intention is surviving until tomorrow.