Tippy
toe
The long, steady
uptrend in the financial markets has been under intense pressure recently, most
notably from an uncomfortable conclusion to the first quarter because of disorderly
political rhetoric, and from an inevitability that interest rates will be
rising in the not-too-distant future.
Going from a Pollyanna
mindset to Godzilla-like panic in the span of just weeks, the market is
revealing...as it always does....the capriciousness of unexceptional buy and
hold investing.
Of course, certain
segments of the economy (Non-Cyclicals, Technology) have shown an immunity to
the short term volatility, but an even larger universe of stocks has
"given back" its first quarter gains when the going got
difficult. There is no calculus that
applies uniformly to all sectors.
Instead, it is imperative to look at financial and non-financial factors
individually when making selections for a balanced portfolio.
The likelihood of
continued volatility in global markets is putting investors in a foul mood and
heightening the probability of even more unpredictability in financial markets
for the near term.
Thus,
we expect to see a diminution in the percentage
upside probabilities for stocks and
other financial assets for the balance of the year. Unfortunately, the marketplace has become too
dependent upon double-digit returns in the past decade whereas it should have
been considered as aberrant from historical norms.
By far, the biggest
concern we have about continued corporate profitability falls upon the consumer
demand side of the equation. An
uncertain consumer is less likely to part with his discretionary
cash....particularly if he perceives to have less of it! Concurrently, corporations are loathe to
invest in infrastructure, inventory, and research if the demand is not already
built into the pipeline. Who goes
first? Time will tell.
The
banks have it wrong
Tighter monetary
policy, on the other hand, is a non-negotiable burden for economic growth for
some. Prices are rising, particularly in
core commodities and foodstuffs, exacerbating the possibility that the Federal
Reserve and global central banks will hasten to move quickly in addressing
inflation concerns. A worse-case scenario
exists when you have prices rising, consumers recoiling, and portfolio
valuations receding....all of which are germinating in their infancy right
now. If interest rates do climb this
year at the projected rate forecasted, it will mark a line of demarcation away from the boom in financial assets that the last
decade gifted us.
Curious, too, that the
commercial banks have taken their good ol' time in offering up any incentives
and rewards for their savings account customers by mimicking the steady, but
slow, rise in interest rates and offering some of those increases to their
depositors. Instead, they have been
sitting on a mini-windfall by taking those several basis point increases in
yields and applying them to their own assets in the lending area. It's time they be held to account for their
role in delaying the availability of an alternative investment scenario for
clients in CD's and other time deposits.
So much for the feel-good, trickle-down effect of the recent tax cuts
upon the average stake holder.
Alternatives
The jingoism and
isolationist/protectionist oratory we have been hearing in the past year is
indicative of yet another sea change in global commercial standards. While "red meat" for its
supporters, it represents a nearly 180 degree turnaround from the compassion
and optimism expressed by world leaders over 40 years ago at the beginning of
the last great bull market expansion.
We have been championing for a more
enlightened discipline to investing during the past several years, one in which
a keener appreciation of earnings growth driven by need and demand, along with
a social benefits dynamic, combine to yield a more patient approach to
investing overall. In fact, it is
wearisome and generally more risky trying to create a "quick hit"
philosophy, typically the product of a millennial mindset and technology evolving
from an instant gratification way of thinking about how to exploit on-line trading
platforms "efficiently". More
significantly, our goal is to avert the panic and mood swings that
unfortunately have become commonplace and more disruptive to today's
portfolios, and which throw significant roadblocks into the symmetry of
smoothly moving valuations from point A to point B.
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