Market Commentary for the week of August 21, 2017

Loss of energy

It seems to require a lot to take the starch out of the market's sails but, goodness knows, they've sure been trying.  Even the brink of global nuclear war wasn't quite enough  to derail a recent sequence of new highs in the Dow Jones and S&P!!

And why not? US unemployment is at a 10 year low.  Wages are rising, if only modestly.  And corporate earnings continue to impress.

Hold on a minute.  Perception is not always truth.  And, I would argue, the markets are doing their best against a backdrop that doesn't fully corroborate people's vision of what is really happening in the economy at-large.

The most noteworthy of these contradictions is that the wealthy (corporations, individuals) are indeed prospering as stock valuations increase, but the gap between the well-off and those who aspire to wealth is dangerously widening.  Less than 17% of the population actually has a financial stake in ownership of stocks and bonds, the majority of those holding mutual funds or employer sponsored retirement plans.  We shouldn't ignore the discrepancy between direct  equity ownership/speculation and indirect passive investing.  Those aforementioned unemployment statistics also reveal the tale of many gainfully employed persons in jobs which don't offer these professional perquisites.

A majority of those earnings successes, however, is confined to multinational big-capitalization names while smaller cap and emerging market shares take a smaller percentage of the gains.  Most upside news surprises are already priced into stocks at these lofty levels.  As breadth narrows at the market's apex, I see migration into more defensive categories like tangible assets, utilities, and consumer non-cyclicals.  Last week's precipitous fall in global averages can't be directly attributable to heinous domestic political debate, or devolving race relations, or even terrorist acts.  Rather, the market fell of its own weight because, quite frankly, it is mathematically improbable to sustain linear momentum like the kind we have been experiencing.  No one knows what might trigger the next capitulation, but history tells us it's "in there".  

The second significant hedge to the market's success is that we live in a period of stingingly low interest rates that offers no real alternative to stocks as an investment option.  If, for example, one were to choose any other asset class in which to invest (e.g. real estate, art, jewelry, commodities) the cost of borrowing money to obtain these items is so low that over-leveraging, or margin borrowing, hyper-inflates the true value of the asset....the same precursor that brought upon the last credit crisis a decade ago.  We have to be careful that debt levels don't begin to surpass our real  ability to pay back the loan!!

Loss of faith

Lastly, what I find particularly troubling is the hyperbolic exaggeration with which the stock market's pace is being defined.  Indeed, fantasy is not reality, nor can one ever logically conflate the two.  The strain of daily living for those just "getting by" financially is our generation's embodiment of a lack of empathy, and an affirmation of societal greed, that defines this current linear bull phase and our public condition.

We've had these aberrations before and they lead, usually, to introspection and problem-solving at best, market corrections and social unrest at worst.  Of those two, where do you think we are now?

Not being a social scientist I am not expert enough to characterize the resolution to our social dilemma.  But the "problem", if there is one, with the markets can best be mitigated through prudent portfolio analytical methodology.  Beginning with a macro view to define all risk parameters, money flow conditions, and a host of other economic data, we should be able to cut through the subversions of "daydream investing" or hyperbole offered by television commentators and anonymous bloggers.  Reliance upon fact-based statistics and quantitative integers, for example, provides a framework which offers guidance about portfolio drawdown protection.  Taking the guesswork out of investing by using my proprietary algorithms and quantitative cycle analysis enhances our client's upside market potential, while trying at the same time to limit downside risk.

Methodology doesn't require abandoning hope or exuberance.  A healthy confidence level is an investor's best asset.  But the ultimate question for me is whether a skilled analyst can outperform in a variety of market conditions against a similarly confident amateur who tacitly winks at non-correlated events and fails to anticipate the wretched aftermath of his unforeseen mistakes.

Market Commentary for the week of August 7, 2017

So, which is it...?

Within the debate about globalism versus nationalism, advocates on both sides of the issue point to a decidedly nervous consumer base, particularly when it comes to defining whether strategic partners can be depended upon for maintaining fiscal, monetary, and currency stability.  All the while that global stock averages are hurtling towards record highs, the subtext to this storyline is whether these market returns really reflect the true underpinnings of the global economy.

Whether you know it or not, currency non-equivalency is fueling a frenzy in the stock markets, feeding into the globalism narrative even as retail politics tries to pull back from international obligations.  The US dollar's retreat, for example, means that product is flowing out into the marketplace even though production and exports might be exceeding consumer demand for those items.  There is nearly a perfect correlation between the dollar's decline and the rate of the Dow Jones valuation expansion.  Interestingly, the market's rate of increase does not  correlate, however, to the rate in growth of US GDP and economic expansion, particularly if you ask the average domestic wage earner.  We have referred to this phenomenon in previous missives as a Parallel Disconnect......two statistics that appear to be moving in concert with each other, in the same direction, but which demonstrate non-correlated occurrence.

Because the US markets are top-heavy in multi-national corporations, the market's growth percentages are somewhat deceiving.  In fact, statistical growth in multinationals far outpaces that of secondary or tertiary level corporations.  Trade flows are not occurring uniformly throughout the economy.  Rather, the rich are getting richer, the laggards are trying their best simply to survive in an economy where wealth and discretionary consumption is becoming more discrete and relegated to a smaller percentage of the consumer audience.

As a result, we are seeing our models becoming more defensive and more highly stacked away from traditional front-end consumer driven orientation towards back-end-of-the-cycle sectors, most notably tangible assets and natural resources.

Not prepared

The difficulty in trying to synthesize this vast array of disparate data is that the markets process "traditional" analysis differently now.  Why is it, for example, that even as the global and domestic outputs appear to be getting larger that there exists extraordinary pockets of citizen's poverty, hunger, and despair?  Overall, as the financial experience is getting better for many, the chasm between the haves and the have-nots is actually getting wider.

I would suggest that there is a widening empathy gap between acknowledging that you are better off while others are struggling to survive.

Even as many global economies are expanding, other regions...those without sufficient natural resources, infrastructure, or egalitarian governments....are imploding at a perilous rate.  These hotspots are in financial jeopardy.  They are the maladies which have the power to derail the rest of the globe.

People are losing confidence in the skill sets and empathy of their leaders to make responsible fiscal and moral decisions about their future.

Several generations ago, the world was emerging from World War and looking with great hope that mankind could behave differently, more inclusively.  The "bounce" off of our economic and political low point seemed inevitable.

Today, the level of greed and hypocrisy that pervades the equitable creation and distribution of wealth and opportunity unfortunately appears to be our new inevitability.