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.
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