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.