Market Commentary for the week of February 26, 2018

Balancing act

It's impossible to tell exactly where the line of demarcation exists between the threat of inflation  and empiric evidence-based inflation,  but the mere suggestion that things are "heating up" seemed to be enough this month to quash a good deal of enthusiasm for buying stocks and other financial instruments.

While we infer that "anecdotal" inflation is already present in our lives (travel, medicine/medical care, entertainment, housing/mortgages, education, etc.) it took a few television talking heads and several noted economists speaking about excessive development and out of control spending to unleash our ire, and make those sublimated fears become real.

Still, the fact that investors sometimes can't distinguish between what's happening in the stock market and long-term trends within the economy is evidence of a perception chain reaction train wreck that leads to overload volatility across the entire investment spectrum.  The good news is that the situation is never quite as bad as one describes, and it's never really quite as good as the optimists might lead you to believe.

Exactly where all this "bottoms out" is yet to be determined, but if you think all this unpredictability is the beginning of a serious rout, I believe you are mistaken.

Despite the market's volatility, there is plenty of good news....perhaps too good(!)....throughout the financial markets and  the economy at large.  And therein lies the origin of the next chapter...

Looked expensive....and it was

Those who steadfastly continue to create a parallel linkage between financial trading exchanges and data which supports the economy's growth also point to analogous periods in recent history such as 1987, 1998, 2000, and 2007 as proof that prosperity leads to recession!  And while each of those disastrous periods did represent a rupture from the trend which preceded it, today's analysts point to a falling dollar, rising interest rates, and enthusiasm gone wild as transactional catalysts for the next great recession.  Indeed, specific events, like housing bubbles, market exuberance, or hedge fund collapses, point out that which we already know....that you can't put all your eggs into one basket and not expect ultimately to pay the price for it.

Such was also the lesson of dot.com failures a generation ago.  But, as we pointed out in our last missive, the unraveling of one thread  is just a starting point, and not sufficient by itself to unravel the entire economic tapestry.  No, for that to occur there has to be a residue of particulars and mistrust which permeates throughout, a sense that the bounty was "too good to be true", and that we need punishment and atonement to settle the score.  Hopefully, that is not the case in today's instance.

So what is it that takes a docile set of data and transforms it into a menacing period of panic and chaos?  It's a very robust question, and one which involves underlying fear, mechanical market manipulation, exploitation by the "haves", and finally a failure to adhere to an investment discipline for market disorder to occur.  In this climate, metaphorical "blessings" become curses.  What we appreciated yesterday (profit acceleration, e.g.) now represents the underpinnings for stagnation, unemployment, low growth and market reversal.  The New England Patriots couldn't' possibly have won the Super Bowl this year because they had already won it enough!!

Or, as the great Yogi Berra famously opined, "nobody eats at that restaurant anymore.  It's too crowded".

Such is the way investors and analysts turn data on its head to create today's market volatility and uncertainty.  It happens because we subliminally want it to, or expect it to.  But we also need to blame a complacency that bespeaks an attitude which trivializes success or believes it to be commonplace.  "Stocks couldn't possibly reverse course now that they're doing so well", it was said.

Each time the market initiates a trend...both up or down....there are acolytes who gather to say "it's different this time".

I, however, have a notion that it's not different at all, but exactly the same as we've seen, but everyone is too preoccupied with the "noise" to know it.

Market Commentary for the week of February 12, 2018

What?  When?  How?

Just like the mythical Aladdin, it is too late for investors to put the genie back in the bottle.  Try as we might, we just cannot stop a runaway stock market capitulation before it finds a reasonable equilibrium.

Sometimes it seems as if the hands on our clocks are spinning crazily ahead, then behind, moving as if all laws of nature are breaking.  But we have to take a step back and realize that it's not the pullback in stocks that we need to be concerned about.  Rather, it was the elaborate linear acceleration of stock prices that should have been investor's main focus.  If the retreat of last week's prices stunned you, you weren't paying attention to the many admonitions that I, and other, strategists were offering.

The stock markets are a woven tapestry of many factors, some emotional, some fundamental, some mathematical (quantitative), others technical.  But no one single factor has the power to unravel the entire tapestry altogether or simultaneously.  It takes time to disentangle great bounties like the kind we have had in recent years.  We still believe it is prudent to concede the formidable forward progress of the economy since the Great Recession (2008), but also to be cognizant of the pitfalls of non-parabolic investment patterns.

In their haste to buy into a market false narrative...that economics and the stock market are one and the same thing....many rebuffed the negative potential embodied in never-ending optimism and a failure to adopt a methodology for investing which keeps portfolios intact when things start to "go South".  Thus, a panic ensued which fed upon itself.

Now, these disgruntled and confused souls look around and wonder how those same mathematics and statistics that they offered as "justification to buy stocks" just rudely slapped them in the face.  And the reason for their consternation?  Their own greed which caused them to ignore the very risks they most dislike.

Man versus beast

This time, we humbly offer that no "expert" can accurately predict the market's direction every time, nor is there any one right way to invest.  But it is a given that without a stated discipline it is highly unlikely to achieve the outcome you seek, and it certainly is better than always trying to buy the "next great thing".   Only a few savants know how to put a Rubik's cube together on the first try.  Far better to ignore the search for perfection and hype, and put money to work in a balanced fashion....if peace of mind is more important to you than withstanding the kind of flux that the markets generated last week.  Perfection is an ineffective standard in portfolio management.

The financial markets are at once a reflection of what has happened  and what we expect to happen.  They are a manufactured architecture of expansion that has already occurred and earnings (growth) yet to come, fortunes already made and anticipated fortune in the future.

Consider, for example, that one specific focus of measurement is the average's price-to-earnings ratio.  When investors buy financial assets using an earnings-driven criteria, they weigh the rate of projected earnings acceleration against profitability already achieved.  As the market and share prices, in this instance, made new-high after new-high the multiple of stock prices versus earnings also expanded to historically high levels.  So let me ask, "for how long did you anticipate that these ratios could continue to expand...and at what rate?"   Exactly.

There is no question that the empirical integer was too optimistic, and most likely unsustainable.

So, has the market sold-off sufficiently to turn panic and disappointment into a new level of enthusiasm?  Some speculate that computers and algorithms have run amok, taking control of the markets and thereby eliminating the human function, creating the kind of volatility we saw last week indefinitely.

The worst thing that can happen is for investors to be lulled into taking on reckless positions by trying to quickly earn back perceived (or actual) losses.  Cycles are transient, but the global expansion is for real.  Your current distress is a product of inevitable volatility that overtakes heated demand for alpha.  Highly leveraged investment strategies such as ETF's and big-margin accounts have the potential to wreak disorderly havoc upon commodities, currencies, fixed income, and stock market averages for periods to come.

The dour economic talk, however, is overblown, and our (long-term) fundamental outlook remains hopeful.  So strap in and bear with it.  This is what it means to be an "investor".   

Market Commentary for the week of February 5, 2018

Resetting the odds

It only took a few “down" days in the market last week for investors to begin cowering and thinking about how to protect their portfolios from a bear retreat, and what strategies to employ going forward to steady their accounts from a possible calamity of significant proportion.

See how quickly that happened?

So, owing to last week's little “wake-up call",  I thought it would be helpful to reaffirm several points about which I have been writing during the past few months....a strategy for tackling bad (or any) markets:

Any professional money manager worth his/her salt should start the portfolio-building process with a clear understanding of the account's objectives and tolerances for risk.  Too often this one essential is missed, and you wind up with square pegs trying to fit into round holes.  Chasing gains for gain's sake without clearly understanding the risk factors creates a portfolio full of one-off transactions, disjointed from any particular philosophy or methodology.  And, more importantly, this type of staccato investing usually leads to the inverse  of the outcome you expected.  Remember, a good portfolio manager is in the business of managing client's expectations about their money  as much as they are managing the money, itself.  An aggressive account allocated too conservatively is just as futile as a conservative account managed too aggressively.

It is also incumbent upon all parties to recognize that time  is one of the most critical elements to any investment program.  Typically, traders have less of it, and less patience for the whole process.  These are not good clients for investment advisors because without time  no strategy can be successful, really.  Unfortunately, we are in the internet age, in which everything is supposed to have been done yesterday!  That just simply is not what the investment schematic should be about.

If, in fact, last week's pullbacks were to represent a harbinger of more negative stock market news...for whatever reasons might be ascribed....the supposed disaster most likely would not happen immediately or swiftly.....although it might....and probably would look more like a steady drift sideways or downwards.  Fortunately, the most successful money managers do not look to compare to specific portfolio benchmarks ("We were at X value; now we are at X minus 4%.."), but rather maneuver as if they were navigating a vessel, a route of getting from point A to point B.  Most assuredly the progression is not a linear (straight line) configuration, but wavy with ups and downs along the way.

Thus, prudent portfolio stewardship is a matter of consistency of methodology and process  rather than consistency of the integer of results.

Perspective

Overall, the economy and the financial markets are doing better than a decade ago.  The tone has been set by government, business, and social institutions for a more accommodative climate of economic revitalization.  That doesn't mean that the angle of ascent will be straight up.  So if last week put a jolt into you, I would observe that you may have lost perspective about why  you invest, how  you invest, and with whom  you invest.  These issues must always be addressed with your representative to your satisfaction.

Investing must be thought of as a long term set of probabilities, and as a sequence of balances and equilibriums, with shifts occurring constantly that require portfolio fluidity and distribution.

Without a doubt we are at a confluence where changes in interest rates, inflation, portfolio allocation, politics, and consumer confidence are redefining the status quo of the building process begun during the past half-decade.  To believe disingenuously in an inexorable push upwards of stock valuations, and other investment prices, is a tenuous proposition.  The key to keeping one's sanity during this period of flux is to be aware of the forces which ebb and flow, prepare for the inevitable crisis in confidence, and then methodically evaluate one's options for going forward.

To capture alpha (positive return) you must prepare for the long-term and stay true to your discipline.

It's not overly complicated.