"Oh,
the view is tremendous", said one of America's astronauts as his space
capsule rocketed out of Earth's gravitational pull for the first time. And as physics tells us it is so, at some
point his spaceship returned from its apogee and fell unfailingly back to land.
So,
do the laws of physics apply to all moving objects....such as the parabolic,
sometimes linear, trajectory of stock prices?
Financial
markets are not specifically governed by physics, but by the laws of
economics. And yet, the discipline of
quantitative statistics and algorithmic equations are themselves interlinked
with physics and all other sciences, if truth be told. Thus, "what
goes up must come down" is at
the core of the lexicon of physics, financial markets, sports, life, and a
whole panoply of other common sense endeavors.
What
many find almost surreal about the current bull market is the number of times
it keeps making new highs without significant capitulation. Who knows, maybe the laws of all sciences no
longer apply? How many times in your
investment lifetime have you heard the phrases "it's different this time" or "it's
a New Paradigm"? While this
author doesn't disparage those who subscribe to the notion that it is different this time, I am stressed,
nevertheless, by the pervasiveness of such belief.
Strategy
The
thesis which governs my interpretations is predicated upon the ability to quantify factors that define the
movement of financial phenomena, like stocks, bonds, interest rates,
earnings acceleration patterns, consumer confidence, sector rotation, global
trade, etc. Those data if understood
properly can leverage the probabilities of capital gains in our favor, and
allows the user to intercede in, or avoid altogether, any catastrophic
"right side of the parabola" disasters. Sometimes price compressions take generations
to occur. Other times, they may occur in
a 24 hour span. I'm sure you've seen examples of both. They are a fact of life. History has shown us so, and so too do the
laws of mathematics. It is the ability
to stave off the unforeseen consequences of a failure to plan that makes my
profession so interesting and so valuable to clients.
The
bright lights and fancy bells of 24 hour business news coverage feed a vicious
narrative of unrelenting success that too many unsuspicious investors buy into,
thus creating a parallel landscape of impractical expectations.
I
ask you to reflect back to the humbling and disastrous portfolio experiences of
the dot.com crash and this past Great Recession/credit crisis as examples of
something to which your euphoria blinded you, and the panic they created in
boardrooms and kitchens worldwide.
Investing
requires strategy, methodology, diligence, and patience. One cannot ignore the existence of obstacles,
just be nimble enough to navigate them when they arise. Whether passive or active with your portfolio
you must be aware of history and certain flash points that inevitably occur and
which might have significant corrosive effects upon asset valuations.
Markets
Despite
any misgivings I have about the linear nature of the market's recent phase, we
have nevertheless been a full participant in the investment landscape within the limits of our client's stated
risk tolerances and their longer term expectations for performance. When moving from zero probabilities....as in
the post recession doldrums....to nearly full stochastic integers of present
valuations, one must always be prepared for negative catalysts.
One
of those catalysts is the growing global divide between the wealthy and the
impoverished. If economic growth is to
be engendered worldwide and domestically we have to find a way to breathe new
life into the less affluent and their access to healthcare, education, transit
and infrastructure, homeland security, banking and commerce, and institutions
of faith. The big X-factor is that a preponderance of
the concentration of money in today's world accrue to a very small percentage
of the populace even as more around them degrade financially. The clock is ticking for those at both ends
of the economic paradigm.
Yes,
the Great Recession is in the rearview mirror.
But even as the economy has raced back from its depths, it has taken on disparate
meaning for different parts of the market.
Will recent US tax legislation, for example, really unleash greater
prosperity, or might it exacerbate an economic chasm that has already alienated
a significant segment of the population?
Can the short term good-will created by a legislative accomplishment be
sustained into legitimate long term investment and bounty?
Soaring
stock markets only fuel so much of the recovery...and only for those fortunate
few, as mentioned above, who have the resources to be playing in that
arena. Who's paying attention to and
voicing solutions about areas of social need such as eradicating hunger and
poverty; clean water access; cures for medical pandemics; computer and
bioscience research and development; geriatric care; crime prevention;
affordable education?
In
the end, a misplaced social trend which exclusively covets capital gains and
corporate profits could wind up squeezing dry the goose that lays the golden
eggs. Excessive social inequality erodes
public cohesion, consumer confidence, and ultimately growth itself.
The
more we are surrounded by exogenous noise, the less attention we are willing to
pay to anyone else. Failure to focus
upon others is not, by itself, a cause of financial crisis, but it is
reasonable to assert that apathy has the ability slowly to unwind progress that
has already been made. Accounts have
shown us that periods of financial instability or inequality always follow epochs
in times past where excessive asset growth, corporate greed, wage imbalances,
and euphoric passion have been disproportionate to underlying principles of
fairness and distribution of opportunity.
Low
interest rates, for example, are creating a climate in which prices of stocks
have been driven up simply because of a scarcity of alternative choices, thereby
fostering a riskier playing field while accommodating investor's hunt for
absolute return on assets. Global
central banks, including the US Federal Reserve, have left themselves painted
into a corner with no choice but to adjust interest rates higher while they ballyhoo
the data indicating higher consumption, price pressure, and lower
unemployment. Curiously, our analytics
observes very little evidence of rampant inflation or price pressures that
might typically define an excessively out-of-control economy. We do see, however, that anecdotal cost-push
pressures are slowly eating away at household take home pay and exacerbating
the anxieties that the “average citizen” feels in trying to succeed in the
global economy.
Our
asset allocation for the coming quarter will be much more selective based upon
our interpretation of the facts. Because of pervasive bullishness about
financial market's performance, our goal now is to identify those financial
instruments that are quick to respond to a volatile US dollar; rising interest
rates; slower earnings acceleration patterns; secular changes in energy,
healthcare, housing, productivity; and a world in flux because of regional
disputes and terrorism. Indeed, the range
of probable performers is a smaller list.
The task, obviously, is to winnow out plausible winners from those
securities that we deem untouchable. Therefore,
we begin the year as we ended it: taking profits when available, selectively
adding short-term time deposits to lessen portfolio volatility risk, and
rebalancing into emerging markets and opportunities whose downside risk is diminished
by early stage, left -side-of-the-parabola cyclical nexus.
Conclusion
The
seeds of change require a long gestation.
There is still abundant opportunity to participate in the flow forward
of stocks and other financial instruments.
Irrespective of the Fed, global central banks, the US Congress or other
social domains, there is always a bias to improve one's lot in
life....financially, educationally, spiritually. It is how we perceive financial trends,
however, that makes those struggles more identifiable. "Fairer
trade", "increasing GDP","
declining unemployment" are abstract concepts to anyone working
paycheck to paycheck, burdened by illness, poor education, hunger, thirst, or lack
of hope.
Our
portfolio strategies for the next quarter will reflect a broader secular redirection
and rebalancing away from consumer-driven (consumption) sectors towards
tangible assets, pricing power, production and manufacturing sectors, and
inflation oriented developments. This
month, we also introduce our Agriculture
and Food investment strategies to couple with our earlier initiatives in Global Water, Alternative Energy, and Health
and Life Sciences. We believe these
concept investments resonate well with our operational mandate of risk
protection and strategic asset allocation.
A solid base of earnings acceleration and dividend investments will do
more potentially to offset risk posed by excessively high valuations across the
current continuum than speculative one-off investments or misplaced hyperbole.
Suggested
balanced account asset allocation, Q1, 2018
Equity: 60%
Fixed
Income: 24%
Cash: 16%
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