Market Commentary for the week of May 21, 2018

Believing the earth is still flat...

The emotional turmoil that is the financial markets has caused many investors to abandon common sense and fact-based analysis in place of a kind of 15th century-style town square deference that still believes it is possible to sail off the end of the world,  or that witchcraft causes evil in the municipality.  These are usually the type of investors who are focused upon wringing just a few more points of yield out of their portfolio each monthly statement, or who chase return based upon the "latest" product, strategy, sector, or guru offered up before them.

They are people whom you know (you are not one of them!) who manage.... or who ask their advisor to manage.... their account with the explicit message "not to miss out"  on the market's latest fad or current hyper-profits.

This paradigm mostly exists because people are greedy, they believe in mythology, or they don't/can't discern between investing for the long-term versus speculation on short-term, get-rich-quick schemes.

When someone is pounding the table in front of you, very seldom do cooler heads prevail, even when facts trump mythology.

Despite the market's current bull expansion...and traffic congestion here "at the top"....we have seen this form play out in other times.  A bear market (when it occurs) is usually a matter of sequencing in market cycles and has its most deleterious impact by the stark contrast from the euphoria which preceded it and the perspective by which its danger is perceived.  Not so coincidentally, its ominous offing happens to be one of the factors causing current investors to try to maximize as much as they can as fast as they can.....

....not to mention the powerful attraction of making a lot of money while the getting is good.

Who's steering the boat?

But this bull market in particular is quite unusual, not just because of its duration (9years), but because (at least from this writer's perspective) it doesn't "feel" like a bull market expansion to many of those not as fortunate to have cashed in on the last decade.

Typically, an expanding economy and an intensifying market go hand in hand.  Why is it, then, that teachers are on strike in cities across America fighting against low salaries and lack of supplies; storefront businesses are vacant in several small communities; large multinational industries are at death's door; paychecks seem not to go as far; indigent populations worldwide are migrating en masse; some children in war torn nations are hungry and orphaned; and a significant majority of us just sometimes feel more fearful about the future?  Are those characteristics of an unbridled financial boom?

The difference this time might partly be attributable to 3 factors: (1) technological innovation (2) low global interest rates (3)a decline in empathy worldwide.  While not the exclusive causes of our discomfort, all three are fueling a vortex which spirals attitudes downwards, not up,  making it become just a little more difficult to be neighborly and empathic.

Economic booms are not just financial events, they are social compacts  as well.  When one does well so, too, should the rest of us....or so it is anticipated.  And we should be proud of the accomplishments of others because they enrich the human experience for all of us.  The history of man is still being written, so we can't give up on the story just yet.  But we should try to avoid any timeline comparisons between this decade, or that one, and focus instead upon the remarkable progress populations have made in medical research, ecology, food and water research, replenishing energy resources, and building a functional infrastructure.

A well diversified portfolio should not be expected to respond minute to minute, quarter by quarter, year over year to peripheral or exogenous events.  Investing is not exclusively the art of chasing profitability, but rather directing one's resources towards innovation in people-saving motifs, and trying to avoid hyperbole that stifles markets just when we need entrepreneurship and capital to help us the most.  

Market Commentary for the week of May 7, 2018

Photoshop

Excessive worry and volatility in the stock averages last week raises the question of whether there are true structural impediments to another bull run, or simply perceptions that the market is overbought.  It also raises a time-worn question about whether stock markets, themselves, are snapshots of current  information and valuations, or whether they are in fact a proposition of "baked-in" data regarding future  expectations about business and the environment towards which they are flowing.

This important distinction resonates because the former should have you enthused about the longer term prospects for earnings expansion, whereas the latter might cause you to lose some sleep about how much further business and the markets might go.

Ten years after the collapse of investment bank Bear Stearns and the subsequent financial crisis that unfolded we find ourselves at the very nexus of what market statistics today might mean about the future.

We see no clear or imminent signs of economic reversal.  We do acknowledge, however, that the pace of growth  might possibly dissipate.  With the Federal Reserve indicating their intentions to raise interest rates several times this year that notion takes on additional resonance.

In spite of exogenous noise and current events, we find that the seeds of expansion are firmly sown.  There is a disconnect sometimes between fiscal policy and monetary policy, but the phase of market cyclicality is still only mid-course.  Despite any contradictory anecdotal evidence, our research still finds that the global economy has sufficient staying power to avert any real reversal.

Indeed, GDP is finally showing signs of expanding, wages (for some) are rising, and inflation...the great bogey for the Federal Reserve....is nowhere near destructive or counterproductive levels. (We remain unconvinced, however, that the recently passed tax cut legislation will do anything but provide a temporary floor to the stock market, as corporations use their new-found largesse to buy back shares rather than initiate any new capital spending initiatives, expand hiring, or invest in research and development).

Following in that vein, the economy is not yet working for everyone.  So far the biggest threat that the last decade's success poses to the economy is the ever widening gap between those who are doing well and those still struggling to achieve financial equilibrium.  Whereas those gaps by themselves do not cause a recession, the issue sounds a clarion call for our legislators to do a better job in leveling off the playing field.

Our view is that stock prices today are nowhere near indicating an economy at full capacity.  Quite the contrary, as mentioned above, the recovery is universally still quite tepid.

A strong, full employment economy should be the goal and would represent the best possible outcome from which innovation and entrepreneurship could flourish.

We recognize the potential headwinds and obstacles.  But we are loathe to encourage additional "manipulation" or alchemy by the Fed or Congress to achieve unencumbered markets.  The current bull began ten years ago with a healthy dose of central bank and political stimulus.  The aftershocks are still being measured.  It takes a fairly substantial amount of tax cuts, spending increases, and monetary intercession to effect a redirection in the throes of a recession.  Thus, it would be prudent to maintain vigilance without additional mediation  to get the true measure of where we are in making the economy stronger.

The hazard of tinkering with the expansion is that you run the risk of making it more difficult to quantify the exact pressures you alleviate or those which you exacerbate in the short run.  Quantitative statisticians typically wait to apply metrics to the future because trends need time to develop.  We are not in the business of gambling or speculating about whether things are changing....we actually wait until the changes are occurring to develop probability scales as to the magnitude and duration of the evolving situation.  For example, upward pressure on wages is a statistical fact.  However, the magnitude and breadth of the phenomenon is well below what economists might suggest is an effective force to change purchasing and savings rates for the labor force.  If the data is to be believed....and its effect upon current financial markets....then aggregate consumer demand must project out more fully and more robust for the scenario to look much better.

 To us, current stock market valuations are simply a snapshot of today's estimation of corporate conditions, and not yet a representation of what we believe to be economic growth still in the pipeline.