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!!
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