Market Commentary for the week of November 20, 2017

What just happened?

Amid deepening concerns about foreign trade, world despots, and US tax reform financial markets last week peeked into an abyss, if only for a moment, and didn't like what they saw.  It's pretty simple.  Markets are deeply advanced and the slightest hint of conflict could send the overbought euphoria lurching in the other direction quickly.  So pervasive was the jolt, it exposed weaknesses in Europe and Asia, as well.

The point is that it doesn't take very much to induce skepticism in an age of secular momentum if the self-assurance behind that advance is inconsequential.

But lack of resolution isn't' a new phenomenon for the financial markets.  As far back as last Spring consolidation amongst sectors began to shift leadership from traditional consumer brands towards tangible assets and special interests.  The good news was that as stocks rose, all sectors participated nearly uniformly.  The bad news was that the caboose began to pull the engine rather than the other way around.  The economy, and the wealth gap, started to fracture traditional consumer demand in lieu of pricing pressure and nascent inflation.  The resiliency of the recovery, post credit-crisis, was about to be tested.

Confidence is a lovely thing when it is buoyed by facts and shared by everyone.  Unfortunately, too many risk factors weigh heavily upon investor's daily lives, which in turn affect their comfort level with their portfolio investments.

Unequivocally, the economy is moving steadily forward.  By all discernible measures the data are improving...earnings, capital expenditures, portfolio growth, to name a few.  Ultimately, there is only one true measure of financial success...capital gains.  But it also needs to be stated that financial success is not always the metric by which one gauges the quality of a population.  Good health (mental and physical); infrastructure; personal “peace"; morality and compassion for others are all other measurements by which we take the temperature of how well we are doing.

We know, too, that during periods of stock market instability there are always counterweights which serve as safe havens.  By focusing on the longer-term and eschewing the sensationalism of daily financial media, I find some of those alternatives today in biotech research, environmental sciences, education, finance, agriculture and water, renewable energy sources, and technology.  The mere fact that correlations appear to be “decoupling" is proof enough that active portfolio management is needed now as an effective tool to counterbalance the risks.

Don't brace for impact just yet

Last week's mini-eruptions in the stock market are not a harbinger of a new bear phase.  Rather, they demonstrate just how risky investing can be in a market punctuated by new highs coupled with reckless emotional abandon.  It is always the case that when probabilities exceed a maximum sustainable level, a higher premium is placed upon product selectivity, methodology, and patience.  How often does the market seduce you to buy “at the high" or to panic sell when everything is going down?  Placing enormous singular bets “on black" is the architecture for portfolio collapse.  Our clients know that that is not our style.

Within this brewing cauldron of politics and economics the markets look to any knight in shining armor to provide outside guidance.  It seems unlikely at this juncture, however, that either the Federal Reserve or the Congress has the gumption or the perspective to provide that leadership.  Embroiled in their own dysfunction, our Congress is polarized and playing to their respective base, while the Fed embodies an experimental paradigm that pays greater homage to keeping borrowing rates low than to producing results that reflect our expectations.

Despite the unsettling hiccup of turbulence last week, these are issues which take months and years to resolve...not days.  Applying a consistent process to portfolio asset allocation helps to reduce the timbre of the rough spots.  This is a business of “artistic design", not perfection.  The subset of investors who rely upon unbiased, and unemotional, decision-making is small but usually the most successful in the end.

Happy Thanksgiving!!

Market Commentary for the week of November 13, 2017

As markets apparently permanently reside "at the top", this robust landscape offers us a glimpse of a new migration into what it now means to be prudently asset allocated.  As this new normalcy comes into focus the debate about whether these benchmarks represent a dire warning sign or new definitions  heats up.  While I certainly believe that there is the possibility of retrenchment in stock prices, many are just accepting the status quo as the new norm, thus making up new rules and standards as they go along.

Contemporary asset allocation models are not, in fact, new.  Many of the investment themes we see today have been here before.  When economic power shifts towards stocks (as opposed to fixed income) upside premiums shrink and financial risk heightens.  Additionally, lower yields in bonds creates a more volatile landscape that moves to a more staccato beat, more trading, and less long-term certainty.

If this is correct, then what does the "new normal" represent for investors going forward?  The answer lies in one's tolerance for emotional stress and higher portfolio hazard.

Indeed, when investing was "easy"...requiring very little in the way of imagination or innovation....asset allocation was simply a matter of using widely held percentages and gradients to determine one's ideal portfolio settings.  Low risk (and low equity exposure) produced low(er) alpha and higher sleep-at-night quotients!!  Allowing for the occasional exogenous event was very rare and sometimes predictable as to what it might be and when/where it might occur.

In that context, companies with strong consumer franchises did better than most other stocks.  Real estate, brick and mortar retail stores, durable goods, and financials all thrived when cash was king and buyers were "flush"....a golden age of productivity and commercialism.  Investors need to realize, however, that all journeys...economic and otherwise...are parabolic and transitory.  As quickly as "guarantees" materialize they can also evaporate.  At the gambling tables this is referred to as the "law of averages", and invariably those "laws" catch up to you.

Today's consumer landscape looks much different, and far from leading  the economy is lagging quite badly.  Notice how companies who had a rich tradition of decades-long earnings acceleration and high dividends are no longer the darlings of Wall Street.  As the economy has changed so too have the metrics related to those hallowed brand names.

Correlations between and amongst our business network have changed dramatically, too.  Blue chip stocks don't transact with one another the same way they did a generation ago.  The "old normal" has been turned on its head by technology, politics, recession, terrorism, and globalism.  The" modern" portfolio has unwittingly become more short-term oriented, more volatile, more aligned towards tangible assets, and just a little bit scarier.

I still believe, however that a good portfolio is "agnostic" when it comes to capitalization, region, or sector.  For example, I remind my readers that topics that relate to future generations and socially responsible subject matter can produce significant capital gains potential.  Clean water; global security; efficient renewable energy sources; eradication of hunger, poverty, and disease; technological innovation; education; infrastructure; and personal values score quite high on my valuation and capital gains assessments.

The new baseline for the modern portfolio "at the top" should still be highly correlated to quantitative analytics.  However, the most meaningful quotient is the one that reflects people's needs in juxtaposition to an aristocratic hierarchy.  Any portfolio approach which too narrowly selects "concentrated" positions should be a non-starter for those looking to reduce risk.  In a world of overly ambitious, singularly focused, vastly speculative portfolio construction it helps to minimize drawdown potential by adhering to a strategy of top-down themes rather than attempting to corner the market on a particular sector or strategy.

In particular, classic macro portfolios should have exposure to a variety of projected earnings performers from a multiplicity of sectors and topics.  Our example seeks to challenge conventional wisdom about focusing on the near-term  or news-driven  events.  In fact, those very narrow parameters typically result in a backward looking weighting approach.  We, on the other hand, look for analogous trends and fundamentals which predict the future prospects of companies by using historical parallels regarding intermediate and longer-term outcomes.  Lastly, there is no "ideal" portfolio.  Rather, there are ideals to which one might subscribe that deescalate the impact of current events or other adaptations that amplify risk in a portfolio.

Market Commentary for the week of November 6, 2017

It has been obvious, even to the casual observer, that all market gauges are running hot, pulling an overwhelming majority of stocks along for the ride.  But for that reason alone I have been rightfully accused of being both a cheerleader and a wet blanket...stressing that one has to play the advance very carefully and with a great deal of discipline.  While the divergences that we thought might have materialized as the rally extended have not, we remind anyone reading that typical rallies do not traverse straight lines, and that ignoring caution is most always a recipe for an unexpected disappointment.

Mind you, there is very little "negative" to fixate upon at present.  There are enormous pockets of strength in Basic Materials, Non-Cyclicals, and Technology, amongst others.  But as you are aware, even after replenishing our accounts with specific "buy" candidates from our October 1st recommended list, our bias is to take profits in here, not to be speculating indiscriminately.  The glamour names might attract the balance of everyone's attention, but you can't afford simply to keep buying without any discretion at the top of a market cycle.

Although not a technical analyst, I urge everyone not to chase a price trend, and to buy when the odds favor capital appreciation instead of price reversal, especially in the short-term.

On balance, I am cautiously optimistic about the intermediate term (3-5 years) for equities worldwide.  I would only change that bias if a huge preponderance of stocks were to "tip over" and begin to break below significant price support levels.  Right now, we are a long way from that happening.

It is interesting to note, however, that following the latest earnings season reports there are fewer "aggressive buy"  recommendations emanating from Wall Street analysts than earlier in the year.  Perhaps this is attributable to late-year caution.  Perhaps it is related to the inertia in our political discourse, or global instability, or simply bull-trend fatigue.

There is very little doubt in anyone's mind that the run-up in global bourses is advanced.  As long as interest rates remain low there is just no other alternative to stocks for investors who prefer to be fully invested and who seek capital appreciation potential in their portfolios.  Once again, I must admonish that when "everyone" feels compelled to own stocks (or anything for that matter) history tells us it is the most dangerous time.  I am not  predicting an end to the bull market.  Quite the contrary.  But the market stereotypically undergoes cyclic phases, both up and down.  As long as my relative strength integers (RSI) remain as high as they are, I believe investors should at least prepare themselves for the "other side" of the parabola.

Where things get interesting now is trying to justify and pick apart the causes for the rally.....

I have already given you my primary element contributing to stock appreciation: low global interest rates and accommodative monetary policy worldwide following the credit collapse in 2008.  The Federal Reserve's Open Market Committee (FOMC) meeting last week proved to be a real yawn because their conclusion was to announce that the economy is doing well, and that they will continue to monitor closely any developments in price inflation.  It is widely expected that they will act (raising interest rates) before the end of this year.  Concurrently, October government statistics were released mid-week indicating that jobs and wage growth also are doing better than forecasted.  Curiously, the Bank of England used this same benign data last week to raise their lending rates by .25 percent for the first time in a decade...a modest acknowledgement of some inflationary pressures within. 

Were growth and demand not  to improve at the rate economists expect, central banks have left themselves with very little room to maneuver, and certainly not at the magnitude with which they did a decade ago.  Besides, monetary policy can only do so much.  The world requires coordinated fiscal policy to address social requirements and regional financial inequities which impede demand from sustaining. 

There are no warning lights, beepers, buzzers, or sirens that come with this "erector set" of investing.  Do not wait for the" opposite" of your expectations to occur before you address your portfolio comfort zones.  My role, and that of any professional money manager, is to make sure that there is sufficient diversification...by asset class and by security type...to heighten the probability of alpha, and to mitigate (but not eliminate altogether) the effects of complacency or something even more challenging.

I always prefer that markets traverse a carefully defined parabolic sine wave.  Unfortunately, in this linear, and speculatively, oriented current landscape the best we can hope for is to evaluate intrinsic value in companies whose share prices are igniting, and to orient our portfolios around long-term demographics and sectors that perform positively irrespective of short term influences.  I have said repeatedly that we find that potential in agriculture, technology, water, alternative energy, telecommunications, tangible assets, and consumer durables.