Market Commentary for the week of December 17, 2018

Old rules don't apply

Markets have become so volatile, and so vexing, lately that it is not unusual to see an investor figuratively pick up his portfolio "ball" and just go home to wait it out.  I'm not referring to a "sell everything" mindset in which one attempts at some later date to time their next entry back into the market.  No, it resembles something more akin to just leaving the festivities to someone else for the time being, holding on to whatever gains one already has, and reassessing the situation after the turn of the year.  To that effect, I am predicting that while the numerical integers surrounding the daily performance of the averages might continue to be significantly volatile for the balance of December, the sheer breadth of participation could be somewhat muted.

So why, then, do investors continue to play by the "old rules" in which buy and hold  produces severe emotional distress every time the Dow Jones goes down (or up) 500 points?  Certainly, not tinkering with the portfolio is more advisable than micro-managing one's account.  But current events are a dreadful reminder that markets do go down and that euphoria and bull markets can only last for so long.

Therefore, this is also a good moment to suggest that even though the last few years have been financially rewarding, the whole endeavor of portfolio construction and management is to reduce risk and to mitigate against the potential for collapse....such as we are seeing currently.

Was this bear capitulation a surprise?  Only if you haven't been paying attention.

The value of a quantitative discipline (such as the kind my proprietary database, ArlingtonEconometrics, proscribes) is that one can more easily compare valuation metrics against a reliable data history so as to remove exogenous variables that might distort the analytical process.  In other words, quantitative methodology provides a consistent numerical framework for creating asset allocation within a portfolio to reflect more precisely each client's risk/reward metrics.

Which are you... buying and holding, or rotating sector weighting  to cushion the effect of a myriad number of factors that influence portfolio dynamics and performance?  To be sure, there are many influences upon financial assets right now, from interest rates, politics, trade, social imperatives, and more.  This is not a time to move along without a science or discipline.

Lesson learned

Conventional modeling is not right for everyone because it imposes a one-size-fits-all predisposition to building wealth.  And, as we experienced in 1999 and 2008, it also doesn't allow for subtleties and unintended extremes, nor a speedy recovery from market catastrophes. 

Having a "balanced portfolio" doesn't imply inertia.  Rather, it means boasting a fluid process of daily evaluation...even if there are long periods of portfolio transactional inactivity as a result.

The basic fallacy of the "old rules" is that they accept as true that times are always indestructible.  And yet, history...and current events...shows us that each day  is fraught with its own unpredictability.  To wit, the current investment tapestry has become a living nightmare for traditionalists.

The goal should always be to diversify and to recognize that efficient adjustments in asset allocation play a greater role in the probability of portfolio success than does any individual security....or offbeat speculative wager you might make.... within that portfolio.  It is human nature to think about your portfolio in terms of each component's  profits, losses, price, etc.  I understand that.  But successful investing is regarding the well-oiled aggregate  of portfolio mixture, time horizon, and performance relative to one's long term discipline.  

Market Commentary for the week of December 3, 2018

Spiraling up...or down?

It may take considerably more time to unravel the mystery of these second half of the year intense volatility swings because the underlying issues confronting the financial markets are so diverse.  Other than measuring the point gains and losses of the financial indices on a month to month basis, many of the factors that are currently impeding or influencing stock price performance are not as easily quantifiable.

Investors seem to forget...and far too often, I would submit....that investing is a long-term endeavor and that given time, the markets usually sort out the issues.  However, it is much easier to lay blame, make excuses, project unrealistic expectations and sulk in a corner of a quiet room than to focus upon the primary purpose of putting one's money to work in the markets: to generate return on investment.

There is no question that the economy is "slowing" a bit, accounting for trade wars, tariffs, interest rate increases, and a changing perception about the ability of the world's bourses to sustain the near-linear rate of appreciation they have exhibited in a post recession climate.  But let's not forget that the data are improving nonetheless.  The incredible thing about short-term manic price capitulations is that panic feeds off of panic even when there is suspect justification for the chaos.  Don't worry....when the bears are done with their selling, the market will find an acceptable leveling off support spot.  Today might not be the most compelling entry point for the stock market, but trying to time the absolute zenith and nadir of the averages is a recipe for disaster, as well.

It is curious, and worth noting, that recent price declines are more severe and quicker than one would like.  Thus, fewer buyers are coming in to rescue the carnage, leaving some pricing gaps that will be harder to repair in short order.

As a result, there are fewer survivors of the downdrafts, including the "brand names".  All ships are lowering to a constant drumbeat.  This is a classic example of "worry" confronting "optimism".

However, it would be quite unusual for the economy to sink into a recession without anyone noticing in advance.  The battle for our hearts and perceptions is now a contest between those who follow the point changes on the Dow Jones Industrial Average  versus those whose allegiance is for the most part to the data.  Once again, a case of mistakenly conflating the markets with the broader economy-at-large leads to a perceptual disconnect.

Baby and the bath water

There really is no definitive way to defend against bear capitulations. Some are wondering aloud if they should sell everything and wait on the sidelines until the carnage is complete.  That is unrealistic....and too late at this juncture, anyway.  I had been predicting for quite some time that the stock markets were far outpacing the economy, in optimism, anticipation, and valuation.  Now that the two have inverted while intersecting it is the market's turn to pause, and the best one can do is to respect that, diversify one's risk, and wait for normalcy to return.

With business productivity escalating, earnings growing, employment widening, and portfolios expanding shareholders should rationally identify that opportunity is still abounding.  Perhaps not in a way that impatient investors are able to see at present, as consumer stocks and technology shares recede mercilessly.  But what about broader social issues that need solving in the next millennium such as healthcare, agriculture, infrastructure, and ecology?  Profits are potentially ripe if you know where to look.

There hasn't been an inflection moment quite like this one, in fact, since a decade ago.  Money being raised in private and public forums for innovative solutions is at an all time high.  With interest rates low and borrowing seemingly plentiful, the movement is about creating  capital opportunity, not dissipating  it.

Mergers and acquisitions don't by themselves create profit and productive assets, however.  We still need to be careful that we are not manufacturing stimulus for stimulus sake but, rather, taking advantage of the potential to use capital to solve problems that leverage the upside of our human condition for decades to come.