Market Commentary for the week of Deember 11, 2017

Are we there yet?

Like the familiar refrain from passengers on a long grueling trip, it's just as plausible to ask "are we there yet?"  for investors in financial assets....with the "there" part not having been fully defined!!  Returns on investment (ROI) have been hefty in 2017, with most of the return skewed towards equities.  One would be hard-pressed to find any ingrates amongst those who have benefitted from the stock market's good fortune.  Last week's financial market activity was much the same...looking around and digesting the news of the week, without much commotion being made.

And yet, that, in and of itself, seems to this observer to be part of the problem going forward.  Make no mistake, I am grateful for the bull run and still find scientific evidence for its perpetuation.  But I also know both anecdotally and methodologically that when things are at their bleakest, hope for optimism should be  at its highest.  Conversely, most bull markets expire during periods of acute optimism.  Such is the world of quantitative statistics and inverse probabilities that I inhabit as an economics scientist.

Nowhere is it written that this bull market has to expire.  But a general sense of "what happens now?" is pervasive and likely to usher in a new phase in the markets which, if not bearish, will be a different kind of bullishness.

The global economy is subject to any number of shifts in factors, not the least of which is a troublesome era of isolationism, nationalism, and terrorism.  The recovery that sprung out of the global credit crisis and "Great Recession" is slowly being usurped by a new populism....a period of global government austerity whose design is to reign in excessive spending, "unfair" commerce, and unnecessary fiscal expansion.  Reforming taxes  is not the issue nor the panacea in this observer's opinion.  Watching people and corporations selfishly holding on to what they've already got  is.  Unfortunate as it may be, investors are hunkering down with their new-found wealth and playing it close to the vest.

This jingoistic attitude is a harbinger of an ever-widening gap between the affluent and the poor.  Should it not also be a wake-up call for markets to take the lead on capital and investment innovation, rather than lagging on the important responsibilities of our time?

One of the most nefarious passive non-decisions  of the market's recent past is how our central bankers have engineered low interest rates, thereby encouraging equity investing, and diminishing the alternative investment options that conservative and yield-oriented investors so desperately need.  Not to mention that these alchemic policies have failed to manufacture the kind of growth that policy makers envisioned when they made borrowing money "free of charge".  And now, as a result, they have literally painted themselves into a "rate-rising" corner.  Thus, government initiatives such as "tax reform" have replaced the power of the Fed to remediate the issues we have with the direction and intent of capital spending.

And now...?

The l reason I am still positive about the financial markets in the long-term is that we see enormous secular opportunities in targeted sectors such as water, agriculture, infrastructure, alternative energy and biosciences as immunization from parabolic excess and volatility surprises.  They also represent, as written in last week's commentary, the very best of us and the potential both to do good and to generate capital gains. The truth is no one knows the future.  One can only conjecture based upon ones' science, methodology, and social value system.

The bottom line is that  we still expect to be "long" financial instruments (stocks and bonds) for the foreseeable future, in the proportions which best represent our client's risk/reward tolerances, and that we continue to believe it is not about rhetoric but fundamentals to move portfolio valuations higher.  Right now, despite the context of a late-phase linear rise in stock prices, we are taking advantage of an underlying strength in earnings expansion in selected categories for the near-term.  Part of that earnings acceleration is due to consumer demand and accounting dynamics.  Another part owes its strength to nascent pricing pressure emanating from anecdotal evidence of inflation in energy, healthcare, travel and entertainment, foodstuffs, and real estate.  This, again, is where a confluence of monetary and fiscal initiatives could have significant impact upon releasing a lot of pent-up frustration...and capital...that investors are holding on to.

No one likes to overstay one's welcome at their ultimate journey's end.  We are not "there yet", but very close.  

Market Commentary for the week of Deember 4, 2017

Selective prognosis

Global hotspots, such as Syria, North Korea, Myanmar, and the Mid-East prompt a moment-in-time  effect for investors and global bourses to ponder near-term consequences and how polarized and dysfunctional some of our geopolitical dynamic really is.  What's particularly worrisome is that we've had these "moments" before in other conflict spots and thus we can extrapolate rather easily their significant cost upon the financial markets.

The direct impact of these global conflagrations, of course, is not contemporaneous.  Yet, the very starting point which makes us human has to give any of us with a conscience pause about what type of world we are going to leave to our heirs.

What we have learned from previous carnage is that it is not the actions we witness today that matter....although heinous....but the generational repercussions for the afflicted upon infrastructure, social institutions, and emotional well-being.

With global financial stock markets perched at lofty levels, one has to ask if making money is the panacea for all human ills, or simply an antiseptic arms-length way of keeping our "heads on straight" while ignoring all the perversions going on around us?

Whether because of or in spite of this obsession with making money, the markets recent cornucopia tells quite a story.  Isn't it amazing how marginalized these conflict zones become the further from their epicenter one resides? Believe me, the closing price of Amazon is the furthest thing from the mind of a refugee in Aleppo or an orphaned child in Baghdad.

There are, as earlier noted, historical precedents for how the world's financial markets have moved in concert with, or in opposition to, explosive man-upon-man atrocities.  Not too long ago the drum beat noisily for war in Iraq.  Yet the markets slowly migrated laterally for nearly half a decade.  The crescendo of political rhetoric was not enough to rally the stock markets then. 

Going back further generations, it didn't matter which side you were on during the Cuban missile crisis.....everyone was scared and the markets were paralyzed as we considered an "Armageddon-like" outcome.  One year later, though, a steadier political climate netted a Dow Jones gain in excess of 30 percent.

Steady hand

Markets are constantly traversing crisis transitions.  The impact of the fear of war or the plight of the less-fortunate is a debate for theologians, scientists, politicians, ethicists, and economists.  The repercussions of these conflict periods can have fundamental generational impact.  The message of those affected by war, racism, intolerance, or bigotry should not be dismissed because we, miles away and disinterested, don't feel it in our pocketbooks today.

The ramifications of economic and political oppression reverberate...if not today, later...into our households; our politics; our military; our religion; and, ultimately, our economy.  Worse, the disruptions they cause to our belief systems and psyche are mostly un-quantifiable.

Variables exist which either quell or exacerbate regional conflict.  Our priority, however, should be to galvanize sanity where there is none and to be committed to providing economic, spiritual, and political opportunity for all players equally.

It's not unusual that trade and industry institutions spend a great deal of time worrying about how to acquire greater profitability from their clients rather than using their financial leverage to broaden their sphere of influence for the common good.  It's not complicated, really.  We all live on this "blue marble" together.  Why not try to use all that brain power to improve the lot of ourselves and others with whom we share the ride?  

By all accounts, such "mundane" human issues....such as hunger, poverty, conflict....didn't deter the Dow Jones Industrial Average from powering forward last week, breaking into super-stratospheric levels, and helping fortunate investors to pad their 401-k retirement accounts.  Even as economic fundamentals improve, the amount of time shareholders spend working towards magnifying their net worth intensifies, as well.  While a significant percentage of us worry about holding on to financial security, there is an even larger percent of the world's population who are simply trying to acquire some.