Market Commentary for the week of July 31, 2017

Holding steady

The most compelling information coming out of earnings season confirms what we already suspected: many global economies are slowly rebuilding back to "normal" and are regaining a type of momentum that erects temporary immunity from direct catastrophe.  While we don't yet see a uniformity in creation of citizen wealth, these nations are attempting to institute measures, fiscal and monetary, that redress many of the leveraged ills pervasive prior to the Great Recession (2007).

Consumers are consuming again, producers are producing again, and researchers and developers are researching and developing again, as well.  There is anticipation that institutions "get it" this time, and broad (wishful) accord by politicians and private enterprise to try and keep it that way.

To be sure, there may very well be another day of economic reckoning ahead....just not right now.  This is mostly true because money center banks and monetarists continue to keep interest rates low. At the conclusion of last week's Fed meeting most of the rhetoric was about positive reshaping of the country's balance sheet.  To do otherwise risks the potential of restraining further economic expansion.

It is not a matter of if, but when another economic reversal will occur.  History and science defines it as true.  But until those negative signs manifest, it's best to ride the wave of market enthusiasm cautiously.  After all, we should give the market credit for its endurance and tenacity.  As long as price projections and quantitative probabilities are on the ascent we will continue to portfolio overweight market leaders, underweight the laggards, and neutral weight all the others.  While risks exist, there is pedestrian evidence that they are pervasive or trend-setting.

The nexus of our upside predictions resides in tangible assets, consumer non-cyclical equities, energy, and yield and earnings leaders.

Some have said that the valuation picture has become a little "pricey".  I concur.  But that excess is mostly in consumer cyclical companies, stocks that have run in the early part of the recovery cycle.  Besides, there is a healthy appetite for mergers in the retail space as companies try to create on paper the synergies and consumer appeal they failed to create at the storefront.  While earnings acceleration rates might not increase much beyond their current capacity, they are far from exceeding historically robust periods in years past.  The porridge is "just right".

Slippage (?)

Many say that the landscape is full of reasons to abandon investments and the stock market entirely and to cash-in our chips now.  To wit, they cite global terrorism; political inertia and discord; regional medical epidemics, food and water shortages; consumer uncertainty; wealth inequality.  Each of these issues is a considerable obstacle, but one that a sturdy capital marketplace and a strong moral compass certainly could vigorously attack with allocation of resources and volunteerism...justification for overturning negativity with optimism.  Winners see problems as temporary impediments/long-term opportunity; doom say-ers see obstacles as cause for despair.

In the technology sector alone we see innumerable solutions and innovation from biotech research, computer interconnectivity, software development, and retail distribution to underdeveloped neighborhoods.  You can make a meal out of those possibilities....

There are also socially responsible investment opportunities in the next decade emanating from agriculture, alternative energy, water, infrastructure, aerospace, and telecom sectors that represent hopefulness for the human spirit, as well as dormant portfolio capital gains for savvy investors.

There is always a good reason to "drive defensively".  I am a living professional example of someone like that.  It is prudent to be aware of realistic investment pitfalls.  But meticulous attention to methodology should help you quantify those risks, respond to them, and arrive at a positive portfolio outcome over time. 

Market Commentary for the week of July 24, 2017

Let me ask....

Are you the kind of investor who checks to see how the Dow Jones Industrial Average closes each day?

Is the face looking back at you in the mirror happy during bull markets, sullen during a bear?

Would a 5 to 10 percent reversal in your portfolio upset or frighten you?

Are you aware of, and prepared for, the notion of inevitability of change in life's cycles?

Nobody knows when the next economic/market correction might occur.  But we do know for certain that "thinking linearly" is a dangerous notion.  When cycle corrections occur, as history has shown they will, one must have clarity and a well-managed discipline.  Such is the inevitability of transformation in parabolic phasing.

We, as investors, have a habit of "getting used to" the prevailing trends.  In many instances we even find excuses and/or justification for why things habitually unfold the way they do.  But because the kind of trends I usually reference reveal over years, decades, and generations, I find that too often one becomes complacent about these phase's causes and effects, and takes them for granted.

Think about some of those phenomena: "bull markets", "interest rate trends", "unemployment numbers".....Add in others such as "political parties in power", "student graduation rates", "crime figures", and more.  Many of these data are represented by the sum total of information preceding and a notion about the statistical probabilities of duration thereafter.

During periods in our history when disruptions, conflagrations, and episodes were less frequent and less pervasive in the media, we almost came to accept these models as "norms"...they way things are and should be.

Be prepared nonetheless

The question I pose now, though, is "are we safe in assuming anything, and is it logical to believe that it's different this time?  Does intuition and historical precedent count for something in determining what will/will not come to pass in the future?"

Be careful, because answering that inquiry with an absolute is a dangerous proposition, as those not ready for change are usually those most affected by it.

In today's financial landscape I see widespread self-righteousness about linear bull trends, portfolio prosperity, interest rate accommodation, and political dogma.  We have left no room for compromise and dialogue between intractable closely held points of view.

Inherent in my science of quantitative market analysis and portfolio management is the notion that all things are parabolic in nature, containing ups and downs, ascent and descent, and that the nuance (and disruption) of short-term and subjective exogenous noise can be modulated within a probability timeline that more efficiently calculates and manages risk better than....or in conjunction with....traditional numbers- crunching and fundamental review.

Notions such as greed  and fear  are actually irrational data within a framework of quantitative analytics in which avoiding risk  might be missed when in a subjectively euphoric or manic state of mind.  Bear in mind, though, that factoring-in emotions into a scientific paradigm can also enhance the overall numerical output by adding a subtlety of dimension to the investment markets which traditionally deal only in accounting and integers.

In practice, a portfolio's best hope is that one takes a macro-approach to achieving investment goals, doing one's utmost to accentuate upside momentum allocations while also underweighting preventable warning signs of change.

Are you ready for what lies ahead?  In the battle of ideology over pragmatism, ideology perpetuates a false narrative that usually results in covering up the financial hurt that many of the less fortunate feel.

Market Commentary for the week of July 17, 2017

Tortoise and the Hare

We enter the final six months of the year focused upon one essential question: can the market sustain the incredible pace of capital appreciation it achieved during the first half of the year?   A corollary to that interrogatory might be "will the economy pick up or recede contemporaneous with market direction?"

I think it is very likely that the financial markets might modestly appreciate in value between now and next New Year's.  We see many more factors that are positive than negative regarding earnings growth, share price performance, and bull trend perpetuation.

One factor, however, which might add psychological reticence to the financial, fiscal, and economic climate is the direction of interest rates and the intent of the US Federal Reserve and the European Central Bank to modulate accommodative monetary policy.  Last week's Congressional testimony by Chair Yellen brought greater clarity to her objectives and timeline for the next few months.  We are late in the current upcycle in stocks and any impediment, real or imagined, might serve as a catalyst to take profits now and to sit on the sidelines awhile.

Besides, the only data not currently baked-in to the financial equations are those things we don't yet know  about monetary direction.  Can profits keep growing at this rate indefinitely? Have we seen the "best of" the recovery cycle, or are we simply at a secular (long-term) starting line?

I must admit that prognosticating  about the markets as an analyst and transacting  in the markets as a client representative sometimes puts me into a complex position.  My client mandate is mostly to do no harm while at the same time competing successfully against a benchmark we mutually agree best defines the client's objectives and tolerances for risk.  The analyst in me can afford to be more dogmatic, more objective about interpreting the data.  Thus, many of my clients perceive me as a risk averse investor....because they require me to be....and not one who cycles information on a minute by minute basis.  We try to limit exogenous noise and economic surprises.  Our methodological doctrine requires us to sell out of losers before they inflict too much portfolio damage, and to hold winners while they aspire to quantitative apexes.

High Wire

It is impossible, of course, always to be right, but we expect the entirety of the portfolio  to be headed from bottom-left to top-right predominantly and to do so competitively to the chosen benchmark .

Modestly, our track record indicates that I have done this successfully for nearly 4 decades.

Therefore, those factors that I currently see as problematic for economic/market direction are still uppermost in my mind.  Inflation, low interest rates, unpredictable consumer demand, high market valuation, political inertia, inventory logjams, regional fragility, all are factors in our quantitative database that have consequence well away from how well portfolios are performing in the near-term.

Seen through the prism of the next decade and beyond, however, there are innumerable opportunities for capital gains and financial reward that are resistant to short-term exigencies...if one might only steel one's self from responding in kind every time something unexpected hits the media airwaves.  

Amidst all this optimism for the future, I must interject that the "feel" of the financial markets just doesn't seem to resonate the same for everyone.  Many around the globe still suffer from medical pandemic, malnutrition, financial challenges, and tenuous homeland security.  Indeed, these "problems" form the basis for private and public investments in potential solutions (healthcare, energy, education, technology, military/defense, infrastructure, etc.).  But the fact that the wealth gap keeps widening, and apathy keeps growing, hastens a "flash point" at which time calm and tranquility might be supplanted by unrest and turbulence.....a happenstance that none of us should wish to see.

Market Commentary for the week of July 1, 2017

Left Behind

Because of the market's remarkably strong, sustained bull-run, it is no surprise that some investors havestained bull-run become a bit complacent about doing any difficult or time-consuming due diligence regarding market research.  After all, hasn't just about everything gone right with portfolios since last September?  Intoxicatingly, investors have come to believe that every cloud has a silver lining.

But a deeper look at "everything going right"  reveals that not everything is in proper order, nor are economic signals completely convergent with definitional understanding of what is "consequential" to our overall economic well being.

Obviously, no one knows for sure whether the bull will continue or collapse by the weight of its own success.  What we do know, however, is that there are uneven probabilities ahead for capital appreciation given the wide diversity of economic news and its impact upon each sector individually.

Interesting, for example, that even as the averages are peaking near all-time highs a significant proportion of sectors are lagging in their performance.  The best performing groups are the most defensive (utilities, non-cyclicals, basic materials)..... typically a sign that money is seeking safe-haven versus randomly aggressive speculation.  Will the market capitulate as a result?  Once again, no one can say categorically.  What we can do is read the tea leaves and respond to the probabilities as laid out before us accordingly.

It is also irrefutable that sentiment indicators as well as anecdotal evidence indicates that the public is far more skeptical, albeit hopeful, of this bull market than one might expect in a prototypical bull market run the magnitude of which we are currently experiencing.

Why is this so?  In part because investors have no choice but to buy stocks knowing that interest rates are so low.  Savings accounts and time deposit purchases are no alternative to equities at these levels.  Thus, when or if a panic were to set in a pullback might be more enhanced, deeper and swifter, with the potential to inflict more damage to the "average" portfolio than if it were suitably diversified by asset class.

This is why, in our opinion, television news and 24 hour accesses to current events have become disproportionately influential.  Depending upon which extreme point of view you hold, you're either winning  or losing....in politics, investing, and life!!  This kind of absolutism is no way to build long term portfolio success.  Lacking a comprehensive discipline and failing to have a macro global view of things in general usually leads to panic when things don't go exactly as you had planned.  Dogma and hyperbole are simply too short-sighted from our point of view, and a recipe for portfolio disaster.  Sometimes, a subtle bit of patience yields a more optimal result.

In this author's judgment anything which leads to upside or  downside knee-jerk responses raises the probability of affecting exactly the opposite outcome than expected.

Our research has screened and correlated a number of economic statistics and has come to the conclusion that, despite resounding stock market advances, a large percentage of the world's population are actually falling behind financially, are being left in the wake of market momentum, or are feeling disassociated from economic events that are happening around them .  The wealth gap is widening as more and more money is being localized into fewer and fewer nexuses.

Moreover, the tenor of economic conversation is becoming more harsh, more adversarial.  It seems that the dialogue is more "us versus them" in tone...as if those with financial advantage have something to protect.  Their greatest fear, one assumes, is becoming like those they detest.  In that type of environment the barrage from daily business news channels becomes either an affirmation of one's largesse or a 24 hour constant reminder of warning shots being fired across the bow.  Mankind is losing what is human and humble about the acquisition of wealth.

Unquestionably, we still see overall metrics as strong and likely to provide further validation for equity exposure and growing economic output.  But it is becoming increasingly more difficult to ignore the widening gap between those who have benefited from the market's good fortune and those who have failed to "keep up" for reasons related to technology, geography, corporate accounting, ethnicity, education, or otherwise.  We truly have lost a sense of "oneness" as a culture.  The pursuit of wealth is supplanting a pursuit of life's deeper meaning.  To be fair, this is not an either/or discussion, but no doubt the equilibriums and imbalances of rich/poor, young/old are shifting over the generations.

Markets

A difficult quarter lies ahead as the markets try to digest a dominion of political, fundamental, economic, and current events.  Against the backdrop of a market rally already long-in-the-tooth we must position portfolios to defense against any unforeseen negative occurrences while still holding sufficient capital in abeyance should the opportunity for one-off purchases occur.

Given the complexity of this intersection, we opt for caution over aggression while the world processes Brexit, terrorism, political discord, and highly charged institutional debate.  We do not foresee a calamitous event bringing the market to a halt, but rather a natural recoil of any  cycle that measures at the apex of its time line.  It is not at all unusual to expect that a "linear upside rally" be followed by a cyclical capitulation.

We reaffirm that global economic fundamentals are improving.  Demand for energy, food, housing, medicine, tangible materials, and human resources has been increasing to near pre-recession levels.  There are no indications...at least as of yet....that the cost of money (interest rates) has become prohibitive.  In fact, low interest rates serve as an ardent reason for predicting stock market and economic rallies.

Still, we don't want to appear to be abandoning all logic or scientific reasoning.  The Federal Reserve and global central banks have recently given strong indication that they are ready to reverse stimulus in favor of a more restrained monetary policy, giving us every reason to anticipate  higher interest rates and a reversion back to historically equivalent monetary valuation.  The "bubble" will not burst, as Fed Chair Yellen said last week, but a period of tighter money might have a disquieting effect in the near-term upon stock speculation.

 

With global monetary policy uppermost in our focus, we nevertheless are still waiting for US fiscal (government-related) action on important issues such as healthcare, infrastructure, and taxation.  Thus far we are duly unimpressed, seeing no indication that these debates will lead to funding and action that births meaningful outcomes.  Cooperation between the political parties is at a stalemate.  The impasse has the potential to exacerbate any vulnerabilities within the financial markets, particularly in those sectors that rely upon legislative certainty.

After a very strong first half of the year, we worry that stocks will moderate their pace of acceleration, perhaps even falling in absolute terms for the current quarter by as much as 3 to7 percent.  How else to justify runaway upward spirals without pause or contraction for over 6 months? 

Against this backdrop, and with the unusual inert political overlay of our times, we prefer investment in companies that have strong and consistent earnings, that perform in a variety of market circumstances irrespective of current events or political suasion.  A new market up-leg might indeed materialize as there seems to be no slowdown in the appetite for portfolio ideas.  But those sectors into which we choose to allocate reside at the "back-end" of an economic cycle rather than at its initiation.  You and I are becoming much more circumspect about how and when we select to buy something, and that is likely to continue, and to reverberate throughout a tenuous marketplace.

There is also a fertile opportunity to begin anew at punctuating portfolios with fixed income products.  In a climate where policy initiatives have pushed interest rates to historically low levels, one has to expect that increased economic output will also lead to a gradual redirection of the cost of money.  "Lower rates"  does not mean "forever  lower rates".  Eventually the correlations between stocks and bonds will neutralize to nominal levels.  So, too, will the balance between requiring  taking too much risk and choosing  to do so.  We seek a balance between short-term risk-taking and longer term reward in time deposits. Laddering maturities with careful due diligence is another portfolio option going forward.

Conclusion

Markets are likely to be handcuffed by an unfortunate conjunction of political discord and excessive stock valuation.  Ultimately, our political institutions control the ending to the story.  Assuming even a modest compromise between the opposing sides, this quarter...this year...has enormous potential to yield a healthy rendition to the bull rally.  Those endeavors, however, which are perceived domestically or worldwide as political chicanery, unilateral power grabs, or deconstructive to social and moral values are doomed to disrupt economic forecasting, financial estimates, and personal expectations about one's aspiration to the next rung up the ladder.  

Suggested Balanced Account Asset Allocation, Q3, 2017

 

Equities:              50%

Fixed Income:   23%
Cash:                    27%