Now
what?
The US elections, just
ended, are no longer an excuse for waiting to review one's investment
objectives. With some speed and
trepidation, "New High" advocates have found themselves reworking
their portfolios, trying to make sense out of a scenario I call "parallel disconnect"...the
market decoupling from the economy....and how things suddenly went off the rails
for their investments.
After gathering at
historically high valuations for months, the averages recapitulated due to
politics, earnings concerns, and the laws of physics.
Fundamentals which had
sustained growth expectations....such as low interest rates...took a back seat
to quantitative conditions depicted by high P/E ratios and stochastic
measurements flying off the charts.
Everyone is now wondering what happened to their piece of the pie and
why it is so out of reach. One might
conclude that either the raw data is flawed, or that traditional economic
fundamentals no longer apply or if, in fact, they were simply ignored
altogether.
Inflation, while dormant for so long, is now
my root cause for concern about the global economy going forward. Nearly all capital expenditures will cost
more as rates increase, wage push from "full" employment is
accelerating, real estate prices are at a 5 year peak, commodities and other
raw materials cost more, healthcare expenses are rising, media budgets are
stretched thin....even the cost of a new set of golf clubs is rising. These are anecdotal and quantitatively
measurable examples of price inflation already in the pipeline. Not to mention that the political rhetoric
surrounding Asia (tariffs, trade wars, and regional threats) has exacerbated
concerns regarding slow-downs in corporate margins and sustainable share price
increases.
As a result, we are
focusing our allocation shifts upon consumer
neutral and inflation-oriented sectors
such as metals, utilities, biotechnology, and energy. It is also highly probable that the wave of
profit taking and repositioning into cash will continue at least until the
market finds a technical floor. In the
short run, the influence of the Fed's tightening policies should be negligible,
but noticeable. The international
economies are now the drivers of the globe's financial markets.
Liquidity
revolution
The spillover effect of
a decade of global austerity campaigns is now causing higher costs of doing
business to seep slowly back into the vocabulary. "Free" money, alone, has inadvertently
become the catalyst for the end of the current bull expansion. Sometimes the seeds of something happening
are planted well before its presence is made known. Undoing a decade of accommodative monetary
policies is sufficient to acknowledge those changes' potential impact.
Inflation's reemergence
will impact the profit picture and indirectly set off a series of emotional and
fundamental recalibrations regarding portfolio allocation. The market will no longer be what we had come
to expect from the first half of this year.
Despite what might be construed as negative, the group rotation that develops
will cause us to look at the longer term, top-down scenario as an opportunity
to capitalize upon new cycle emergence in the "back-end" of the
realm. Each cycle phase is yet a new
reminder of what worked, what failed, and what lies ahead.
The story must always
be about how to stay current with, and in front of, factors that constantly
change the probability ratios of making money.
The Fed's quantitative tightening is virgin territory for the
un-initiated. Following their script, we
should expect to see golden fundamentals but perhaps a weaker stock
market. This suggests that growth will
be found elsewhere than stocks or, as mentioned above, in sectors which
previously might have been out of favor or un-sexy to the go-go enthusiasts. Cash has always been an asset class of choice
for me....not a default position.....which is one reason why short term bonds
and cash alternatives are slowly finding their way back into our core
allocation processes.
The bottom line
is.....the bottom line. We will endeavor
to stay the course while searching for capital gains opportunities and
portfolio protection as our core theses.
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