Market Commentary for the week of January 1, 2020

 A Body at Rest

 

While arguably looking ahead to next November's US Presidential election, the balance of investor's focus is upon how they can persist in generating the kind of gains they had during 2019 and maximizing whatever steam still might exist in the rally during the coming quarter(s).

Whether through quantitative sciences or merely good old fashioned intuition, they know that the risk of economic headwinds is intensifying.  Their instincts are to bet on the rally failing at some point, even modestly, rather than gaining additional traction forward.

One of the keenest attributes a money manager can posses is the ability to live in the present moment while, at the same, heeding the examples and lessons of past history.  That past presently includes an environment fostered by fiscal and monetary policy of extraordinarily low interest rates, tax incentives for the wealthy, and economic spending limits without restrictions.  To that end one has to wonder whether it is appropriate, and sustainable, to synthesize the kind of financial landscape in which one asset class is favored over another in juxtaposition to a free market determining such outcome?

When monetary policy acts as a de facto portfolio management process it results in highly skewed and unrealistic results.

Nevertheless, there is no denying the success of the financial markets last year.  Ten years after the Great Recession the economy and the financial markets are recovering quite agreeably.

There is, however, a broad range of opinion about whether the recovery is too old, or just about right.  As observed above, I believe part of the expansion is directly attributable to quantitative easing (low interest rates) and, thus manufactured policies that unleash capital into the marketplace without moral forethought or prudent regulation.  Because of a lack of coherence in social discourse the markets last year were subject to enormous swings based upon breakdowns in consumer and corporate confidence. Tariffs/no tariffs.  Rate hikes/no rate hikes.  Stock market booms/stock market busts.   Without clarity and strong moral direction, the staying power of the recovery is at risk.

Markets

When asking if the economy is "just right" I would direct your attention to the astonishing polarity in levels of achievement for all social classes.  Rates of global poverty, hunger, and displacement are growing inversely disproportionate to the percentage integers by which you and your money manager are measuring your portfolio performance.  Even as you aggregate your net gains and losses for the year, millions of people are going to bed hungry, impoverished, or homeless. 

The situation is not all doom and gloom, however. despite my misgivings.  The economy is  improving and we laud those in the public and private realm whose focus is upon maximizing consumer spending and corporate capital expenditures in order to navigate that improvement across a spectrum of social strata.  For example , no matter who wins the presidential sweepstakes in November, there are many who are searching for a more organic reason to cultivate earnings growth across multiple sectors and for significant duration.

One might actually make the case that current valuations in specific sectors (healthcare, biotech, infrastructure) are actually a little on the low side of their ultimate potential.  Knowing that there is always a reason/season to be fully invested, and despite the short term risks of political and global disproportion, the catalysts for business growth and innovation are all around us.

In fact, owing to the biases of central bankers to keep interest rates low for the foreseeable future, our portfolio construction might be a little more aggressive in the early part of the year to take advantage of the earnings potential those initiatives characterize. The overall trajectory of the financial markets continues to be upwards, and we have no argument if that continues to be the case.

One of the most compelling industrial shifts we are witnessing is the transition from fossil fuels to alternative and sustainable sources of energy.  The enormous costs of this transfer are still quite prohibitive, but is in these efforts that we see a harmonious blending of socially responsible thought with capital and profit formation.  Despite the lengthy timeline for complete transformation of employment and hardware in this realm, we commend any effort to put heart and money into the enterprise.

Not to be overlooked, the same kind of profit projection exists in medical sciences and biopharmaceutical research.  Those diligent scientists who accept this burden are the vanguard of moral, capital, and public policies that bring results for decades.

Consider, if you will, a portfolio for the next decade consisting of environmental, agricultural, technological, energy related, healthcare, education, and infrastructure companies.  The next century is ripe with potential in these and other sectors where everyone can benefit and all portfolios can be "winners".

Conclusion

We are classical "Point A to Point B" type investors.  We are at a stage in the world's political and economic development where choices need to be made.....proper choices.  My proprietary quantitative tools tell me that there is reason for optimism, even in the face of a long odds.  An index-tracking approach  or an indiscriminate "all -in"  portfolio philosophy is simply too dangerous and inconsistent to generate the kind of targeted gains one would expect when marrying aggressive growth with a need to protect capital from erosion. You have to have a better plan.

Too often, exogenous current events can foil even the best of plans.  Thus, one needs to be aware of the possibility of headwinds and hurricanes.  Panic is not an option....planning and methodology are.  We note that the last decade had its failures and naysayers, too.  The only constant in the global marketplace is change.  Shifts in demographics, climate, politics, and moral predispositions marks the history of mankind.  Each time there is scientific or geopolitical innovation there is new evolution and meaning to our old clichés and norms.  

One of the primary reasons for market volatility today is that too many believe that the market isn't really working for them.  I wrote above that the disparity between rich and poor is at its widest in decades, even as analysts talk about how fulfilling the marketplace is and has become.  Still today, at the recovery's apex, only a small percentage of fortunate investors owns a majority of the globe's wealth.  An economic reckoning is in the offing unless these gaps are diminished.  As smaller investors struggle to keep pace, larger fortunes are growing exponentially.

There continues to be a bigger psychological, as well as remunerative, cavern to fill.  While the stock market averages are pushing up prosperity for all investors, the actual "median" wealth figure  is highly skewed by the affluent earning more.  Mistaking the stock indices annual average gains as equivalencies to those extra protections required by good governance for the rest of the population is a disingenuous notion.

The turn of the decade is yet another opportunity to reassess our imperative to help everyone get ahead while the markets are still offering,  The drumbeat of glamorous investment opportunities makes it seem as if everyone is making a fortune, these days.  And if you're not invested, then “why not?"  and "let's get started"  right now.  But still, drill down a little further and you will find that many can neither embrace nor afford those conclusions.  The disconnect is actually where opportunity lies to comb through bones and make sound moral and economic judgments.

For those who care about what's inside the shiny wrapping paper...rather than the paper itself....the year ahead is one of great anticipation.

 

 

Suggested balanced account asset allocation, Q1, 2020

Equity:               54%

Fixed Income: 41%

Cash:                   5%          

Market Commentary for the week of December 9, 2019

What's really going on...?

Looking at things from a macro perspective, you're probably reasonably pleased with your investment portfolio this year.  I mean, that's assuming you are one of the fortunate persons who has the means to invest in the first place... and not living paycheck to paycheck like a significant mainstream of people!

Of course, breaking the markets into its micro component parts  paints a different picture entirely.  The news proliferates with stories of manic securities trading, geopolitical conflicts, declining earnings, and slowing growth.

So, what's the real story?

First of all, there is no debate that stock prices are vaulting upwards.  The rise in valuations coincides with an historic monetary phase of lower and lower interest rates and unabated economic stimulation.  The drop in rates, for example, has even worked to the benefit of bond-only investors, raising the values of their securities as rate levels recede.

At the beginning of 2019, many pundits were anticipating that the US Federal Reserve would continue its rate raising  policies.  But, alas, that was not to be as slower growth forced the policy-makers to reverse course abruptly.

Further, the valuation expansion has spread across the product spectrum to include real estate, other commodities, assets international and domestic.

However, during that same time frame, projections for global growth have contracted, not expanded.  In the aftermath of the last Great Recession we are still digging ourselves out of a financial and psychological hole from which recovery is a moving target.

Recall that in the years leading up to that crash there was an unyielding buoyancy to our expectations and objectives.  Speculation and leverage was running free, fueling the bubble that would later collapse.  That period was a time of higher rates  and nascent inflation  consistent with expectations for a long-drawn-out bull phase.

Now, however, investors are grudgingly putting money to work while they hold their noses and climb the proverbial "wall of worry".  "When will the next bubble burst?", they opine, all the while amiably and graciously pocketing their profits.  Not unnoticed, however, is that expectations are now centering upon lower growth and low inflation for the future.

An economic and psychological timeline dichotomy is what has this bull market feeling a lot different than the surge a decade ago.

Uncertain future

If anything, global central bankers have given little indication that they are going to change anything about their policies, including keeping rates low.  Many nations have actually passed into negative interest rate  territory, reflecting a partiality to keep the money spigot open and further to encourage greater global capacity.  

Bear in mind that these monetary actions are engendered by a global demographic shift: the world's population, infrastructure and manufacturing base is getting older.  Policy-makers presume that something has to be done to stimulate the waning economy before the embers die off completely.

Thus, stuck with this current-events predicament, the markets are reaping the "reward" of low interest rates and accelerating stock prices.  "Cheap money" means that investors can continue to alchemize blood from a stone as long as the other alternatives for investing remain inert.

The problem has not been "solved".  There just isn't any other choice.

Market Commentary for the week of November 18, 2019

Wasting a good bull market

You are hearing at an alarmingly increasing pace that the Dow Jones and S&P averages are making new high after new high.  This is causing a peculiar panic both for those who are in the market, wondering when they might safely cash in their winnings, and those not yet fully invested who believe that the gravy train has already left the station without them.  With markets soaring, the fear of "missing out" is growing.  There is an old Wall Street axiom which mocks this emotion, in fact.  It is called the Dow Jones Theory and it says, "when everyone clamors to 'get in', that is the time for everyone else to get out!".

As you know, we have been subsisting in a "low interest rate" environment for over a decade.  And while the hope was that keeping rates low might spur increases in borrowing and, thus, more economic capacity, the real offshoot of those policies has been corporate cash hoarding and stock buybacks, margin squeezes for major banks,  runaway record stock market valuation expansion, and near-zero savings rates for average investors.  It is as if once the first dose wore off, the central bankers prescribed a second, then a third shot of adrenaline without diagnosing the underlying affliction.

Indeed, policy makers have forgotten the age-old alternative investment scenario, in which risk averse savers might actually be rewarded for building savings and avoiding speculation in the equity markets. 

Instead, just the opposite has occurred.  And yet, no matter which way policy develops, there will always be criticism from one side or the other that money is either "too tight" or "too available".

Is it possible that a lack of alternative options for investors could actually spawn another market collapse leading to a crisis like the one that led to the recent Great Recession? 

Obviously, no one is hoping for that outcome.  But we know that when price-to-earnings (P/E) ratios accelerate in favor of the "P" some kind of reversion to the mean is likely to occur.....unless, of course, the "E" expands exponentially to catch up with runaway stock prices.

Most analysts are forecasting an earnings slowdown for the next fiscal year.  This means that the rates of earnings acceleration  are not likely to surpass the numbers posted this year.  Despite this, the same forecasters are saying that the global economy is weathering all obstacles and still on course for expansion in 2019.  Indeed, the economy, in the aggregate, is far in front of where it was just 5 years ago.

Lesson learned

My hopes are that an increase in interest rates, at whatever time it might occur, could offer some alternative relief for investors and the markets by eliminating what has been a default argument  for buying stocks.  An increase in savings rates of return might inflict short-term pain on the stock markets temporarily, but align more closely with a competition for your dollars without involving unnecessary risk-taking.

It would provide peace of mind for investors looking to "hold on" to, and safely reinvest, gains already won from the recent bull market.  By drawing out the investment progression for clients by including cash, savings, and time deposits, rising rates mollify the inherent risks of an all equity phase.  By injecting confidence, not just cash, into the portfolio process bankers, economists, and politicians would achieve their end-game to expand capital formation.

Have the central banks inadvertently twisted the landscape by their insistence to "stimulate" the economy?  Clearly up to this point they have not created the kind of growth and savings they thought they would when structuring an artificially low-rate climate, so why not address the savings and confidence issues stalling development which they unwisely overlooked previously?

It is shortsighted to conflate stock market prosperity  with unconditional economic prosperity for everyone.   I have called this the Parallel Disconnect....two economic trends seemingly correlated both in magnitude and amplitude but in reality two phenomena just passing in the night without cohesion or compassion.  The global economy is a highly splintered amalgam of legacy versus innovation.  I believe we are in a fertile period of earnings growth for areas of inventiveness such as biotech, healthcare, agriculture, infrastructure, and technology, if the political will and the moral compass align correctly.

 

Market Commentary for the week of November 11, 2019

The numbers tell only part of the story

A big problem for many investors has been how to distinguish between the macroeconomic backdrop versus the underlying performance of individual portfolios and securities selections.  The result is that they are always in a comparison competition  with benchmarks, valuations, and perceptions that are thrust upon them by a ubiquitous information onslaught.

Many of these information sources are well known media channels of distribution, in print and in video, coming from a cross-section of biases and perspectives that may, or may not, share the same value structure and risk profile of the recipient.

Yes, of course, performance is the "end-game" of portfolio management.  But, on a scale of 1-10 regarding issues about which my clients ask me for assistance, portfolio performance is mostly "number 11" on a hierarchy of needs.

Perhaps that last statement is an exaggeration of truth, but it is critical that the desires of investors be reconciled with the realities on the ground, that I do my job by appraising them of those realities, and that the perpetuation /preservation of wealth  is as critical as the creation of "new" money.  In addition, factors such as trustworthiness, consistency of style, and competent service are benchmarks of the client/professional relationship.

The markets and advertisers, therefore, discourage the maintenance of net worth by advancing a contagion of hazard in which powerful messages about risk-taking often supersede the notions of resilience, proven methodology, and financial stability.  Underlying those "beach house commercials' and "friendly spokesperson sit-downs" lies a subliminal messaging that Wall Street uses to its advantage to promote product offerings and fee generation.

As a whole, though, investing is a noble social endeavor illustrated by the history of how capital formation has benefitted the human condition.  So when Wall Street works against its own self-interest by muddying the waters with stories of enormous prosperity opportunities, it sometimes does so at the risk of upending consumer confidence.  Take a look at the "new high" climate which pervades the financial universe right now and ask yourself whether this is really the best time to be committing new money to the markets?  How have recent IPO's in retail, travel, and technology fared?

What is abundantly clear to this author is that greed in our society does not magically disappear and then reappear overnight, as some imprudently might have you believe.  You cannot "time" the markets in the sense of disengaging when things look bleak and reengaging when you think things look good.  The average investor has lost far too many times when applying that risk paradigm.  Corporate revenue streams that endure do so for a reason.  Their footprints extend far beyond their own boardroom.  Their names and reputations are irrefutable.  No 30-second hyperbolic commercial can compare to solid and steady....nor do any financial advisors who promote excessive or inappropriate risk-taking.

What can go wrong?

There will always be headwinds and tail winds.  If you are a golfer or sailor you already know that.  The question is how to appease one's appetite for aggressive short cycle gains in a climate fraught with a multiplicity of secular (long-term) vectors?

Living in the present, while having one eye towards the future, helps to buttress against our worst instincts to "bet it all on black"  when those choices should more pragmatically be between staying within the guard rails or overstepping the boundaries of suitability completely.  Responsible investors should know the difference between, and the consequences of, both choices.

The critical question which underpins all investing and economics is, "are we trying to create a rising number of those who obtain great wealth or are we simply trying to lower the number of those who exist at the bottom end of the pecking order?"   It really doesn't matter because it's all semantics.  The definitive problem with the capital markets, though, is the chasm that currently exists between access to money and a lack thereof by the lower castes.  There is more than enough currency to go around to solve the world's ills, but a stratified hierarchical system of allocation which amplifies the distance between the affluent and the poor harms  wealth creation and social mollification when the intent, clearly, is to do just the opposite.

Market Commentary for the week of November 4, 2019

Uncertain world

I'm hearing a lot of anecdotes, at this time of year, about how investor's psyches are upended and their confidence shot by the myriad tales and tribulations of wars in the Mid East; endless tariff negotiations; Presidential debates; immigration conflicts; global central bank pronouncements; labor strife; volatile stock markets; etc.  Many feel as if they are weighed down by an anchor, uncertain about which way to go.  It is the rare occasion when we hear about good news in corporate earnings reports.

Uncertainty is so precarious and pervasive that it's becoming tougher to make 5 year and 10 year projections.  Curiously, the spike in ambiguity crosses all demographics, all geographies, and all income levels to various degrees.  Pricing pressure and job security are the "dynamic duo" nurturing a good majority of our global insecurity.

Despite a decade of economic expansion, consumer savings and spending are still in decline, particularly discretionary spending.  Thus, a self-fulfilling spiral develops when a "wait and see" economic paradigm exists.  Believe me, the Federal Reserve lowering interest rates, yet again, last week might give the appearance of averting a recession....or runaway expansion (they're not quite clear which!)....but it reminds me of my oft-used proprietary expression, "you can lead a horse to water, but you can't make him spend"!!

It is very hard to imagine that we are in an inflation-driven marketplace.  Nevertheless, what adds to the market's hesitation is a climb in "stealth inflation" on goods and services that the public employs in every day life, including fuel; travel and leisure; food; education; and healthcare.

So, is everything wrong?  Not really.  Imperfections and trends in pricing structure are normal and usually allow for corrections, improvements and improvisation to be made concurrently.  In fact, some areas of the economy are responsibly thriving.  One only needs to look at biotech research, alternative energy developments, and technology advancements for examples of doing good for the public as well as generating profits for their shareholders.

Yes, confidence is inconclusive, but Wall Street is not the ultimate measure of how well a culture is providing for its citizens.  Spiritual capital, as well as "money", is what constitutes the wellness of an economy.  School teachers, for example, touch the next generation of innovators as deeply as...if not more so than... corporate titans.

This notion of "confidence" is one of the key data points I analyze when implementing a portfolio model, because how we "feel"  about the economy is as important as the official data generated to portray it.

Waste not

These elements I'm discussing in this missive are not specifically defined by GDP, the Federal Reserve, or financial bourses.  It is more closely related to one's attitude about life in general, fair access, and supply and demand of much needed commodities.  We are at a time in our existence when we must surely recognize that the value of our connections to others supersedes our own wants and desires.  We only have one planet and one chance to get it right.

Whereas Wall Street and traditional finance requires that one have a good working knowledge of physics, government, and economics, the human condition is governed by more ethereal, less-quantifiable, prerequisites.  Success in both endeavors, however, requires real study and real effort.

Think about it: next year begins the third decade of the current millennium.  Our choices today will reverberate for decades hence.

Market Commentary for the week of October 21, 2019

An elusive pipedream

Some weeks are noteworthy more for what doesn't  happen than what does.  Because the end of last quarter was particularly unsettling for equity prices...and our psyches..., last week's meager up and down trajectory should be viewed as a return to normalcy and a more positive development for the financial markets.  No doubt, however, the ongoing drumbeat of tariff negotiations and Mid East war weigh heavily upon the backdrop for further momentum.

At first glance, the fact that nothing new happened last week other than the usual spate of earnings reports, Congressional investigations, and Brexit negotiations offers us a chance to have another look at portfolio allocation for the current quarter.  It is noteworthy that few are running for the exits just yet.  The fact that we had a week without serious rupture is important if you are trying to determine whether to cash in ahead of any anticipated catastrophes or to stay the course.

To be fair, there are so many (negative) exogenous influences we could cite to do exactly the former (cash in).  Science, and valuation, tells us that there will be a contraction in financial markets...we just don't know when and to what magnitude.  All the while, leadership sectors continue to lead (non-cyclical) while the laggards lag (industrial), and the coincidental sectors provide cover for those in-between.

From "30 thousand feet up" the markets are simply reflecting the overall economic trends of our day, including low inflation, diminishing acceleration patterns in corporate earnings, low interest rates, and a disjointed and confused universe of private investors trying to make sense of it all.

The question one must answer from the variables I described above is how to sort through the multiplicity of dissimilar vectors moving in numerous directions to arrive at an allocation that does no harm while still offering a high probability of capital advancement.  Easy, right?

I still believe there is sustainability to the global economic recovery.  Our recommended list of equities and bonds this quarter is a menu of "conservative aggression".  Even though September took a lot of steam out of portfolio momentum, we are now, nevertheless, in an opportunity to add some elements to the portfolio at a less advanced price than earlier this summer.

Averting crisis

I always seem to be urging caution, or so my readers tell me.  Jumping in with both feet...when the market goes up or down....is the siren call for the uninitiated.  However, I have no doubts about the coming wave of prosperity and capital gains in generational, longer-term demographics in healthcare, alternative (renewable) energy, technology, infrastructure, agriculture, aerospace, and education.  These themes would complement any portfolio, at any time.

Case in point, I see too many desperate investors chasing depreciating securities...fishing at the bottom....looking for validation that "if it's cheaper it must be better to own".   But nothing succeeds like success, particularly companies with a history of increasing earnings and share price over the long haul.  Look, the era of "dot.com hype" is long gone.... over 20 years ago (!!)... and not the kind of aggression that is needed for successful portfolio modeling now.

Instead, we should be looking to cultivate arable farmland to feed the hungry, transmitting water assets to arid territories, and developing 5G technology for this decade's next technological revolution.  There are enough public and private companies engaging in these endeavors right now to keep you busy for quite some time.  And more to come.

The factors which inhibit your portfolio progress are your own restlessness  and an obsession with taking chances unnecessarily.  Looking around at what your neighbor has, or is doing, is a recipe for failure.  Nor are there passable solutions to be found from "slick" television commercials hosted by bearded spokespersons and sexy models, "zero commission or fees" offers, or beach house photographs and fancy parties.  No, nothing beats good old fashioned due diligence, process, methodology, common sense....and a bit of luck and good timing.

This is not a time to succumb to hyperbole.  Be secure in yourself. 

 

Market Commentary for the week of October 14, 2019

Cut the noise....not interest rates

With the stock market seemingly floundering "at the top" investors have turned their focus to another easy target, the US Federal Reserve.  The Fed has been on a two year quixotic journey first of raising interest rates at the tail end of the economic recovery to address concerns that the decade-old surge had been igniting inflation, overspending, and borrowing; then lowering interest rates in response even when political (and economic) pressures imposed a "nope, that's not what 's really going on"  reality upon them.

So, just as with the volatility we have seen in equities, the bond market began a schizophrenic  ping -pong match with itself over which data and opinions were real (or sell-able to the public) and which were not.

But, curiously, the indecisiveness has actually fed into its own narrative and created a real problem for financial markets overall.  There actually isn't the type of liquidity (money) to go around that many experts think, nor is there an appetite right now to be a heavy borrower no matter how attractive rates might be.  Just recently the Fed again "cut" interest rates (the rate at which banks borrow from each other over the short term).

But does that rate cut really affect the lending experience or possibilities for the average investor?

The answer depends largely upon other things well outside the span of Chairman Powell's jurisdiction.

Your wealth, not theirs

For one, the real economic output of the global economy isn't as strong as the experts would have you believe.  For example, nearly 2 percent GDP in the US is not catastrophic, but it pales in comparison to earlier economic predictions or where the economy should  be in an environment of low interest rates, full employment, and a record-setting stock market.

Many, including me, expect the data to continue to improve.  But the exogenous political pressures to manufacture low interest rates and expansive borrowing is an exercise in pointlessness.  Are politicians and monetarists pounding the table for what they see, or what they hope  to see?

At a time when interest rates are historically low, the real rate of return  on fixed income assets is precarious.  The 30 year US Government bond rate has been rising for more than two years.  So as the integer value of rates is going higher the valuation of fixed income securities is falling.  The bond market is going through a mini-crisis.  The Fed's influence is not enough to quell market forces that are worried about bubbles, growth, and a dearth of borrowing.

In fact, the short term activities of the Fed did produce a yield curve "inversion" late this past summer....that is when short term rates exceed the rate on longer term bonds.  But that inversion quickly self-corrected back to historically syncopated levels we see now.

With all the political influences upon global central banks it is difficult to manufacture a cohesive strategy which encompasses economics, geopolitics, financial markets and consumer sentiment, thus putting more strain upon the activities of government and business, not to mention Wall Street's speculators and longer term investors.

If the messengers could just quiet the hyperbolic rhetoric for a while, the dust would settle nicely in our favor.  

Market Commentary for the week of October 1, 2019

The Home Stretch

 

 

Leave it to reckless politicians to bring markets and consumer confidence to a grinding halt.  The intractability of their public rhetoric leaves very little wiggle room in crafting together both a moral imperative  and a capital investment scenario  to address the needs of real citizens in a responsible and forthright way.  Efforts to bridge international boundaries between friends, neighbors, and enemies have come up empty because parties and individuals feel more compelled to try and go it alone rather than seek cooperation.  As Rome burns, the fiddlers play.

 

Why such obstinacy?  Because any effort to conciliate with someone else makes our leaders feel "weak"...at least, according to their words and deeds.

 

Energy shortages, weather disasters, healthcare pandemics, decaying infrastructure, pharmaceutical drug price increases, wage inequality, hunger and poverty, will not wait for political theatre to abate.  Their impact upon life today is incalculable.

 

Capitalism without ethics and leadership is a vessel sailing without a rudder.

 

As we tiptoe into the fourth quarter one can almost feel an appreciable nervousness about leaving behind the tumult of the previous 3 months for what is perceived must lie ahead.  Those who thought the market's expansion was long overdue for a correction were ironically "rewarded" for their pessimism during a volatile tug of war in the last quarter.  Indeed, the lowering tide took down all ships....and 401-k's....in the process.

 

The notion that the time was right for a recalibration in financial assets emanates from a philosophical and scientific belief that a market that is built with no constraints upon upwards enthusiasm eventually falls of its own weight anyway.  So why not now?  But to usher this premise from simply being a hypothesis into a scientific rule requires steady and effective economic policy and consistent rhythm, neither of which applies to the present situation.

 

Measurable economic cycles require a kind of capitalism and mindset that can be depended upon to deliver consistent and noble ideas, which encourages a free exchange of goods and services.  As noted above, artificial interference by speech-making or political fiat impedes economies more quickly than the other things about which we worry.

 

Markets

 

The markets have experienced these kinds of crossroads before, and will again.  Ultimately, however, the ingredient most needed to remediate the current climate, this quarter and beyond, is trust in the fairness of our processes and institutions.  Unfortunately, I see that as the most odious of our shortcomings at this moment.

 

Take, for example, the assumption that stocks trade upon the expectations and accuracy of earnings projections.  Anything which stifles an impartial evaluation of such becomes, in itself, the emotional and systemic monkey wrench that grinds forward progress to a halt.  Even when a corporation produces a "better mousetrap", it is likely to fall victim to a stealth trap door when the guidance used to proffer such information is toxic or inaccurate.  You might hear that "interest rates are too low (or too high)".   But it is moral persuasion  and coherent leadership  that opens wallets much faster than anecdotal conversation about the yield curve.

 

This is the kind of moral meaninglessness which keeps people awake at night.  Despite empirical evidence that real economic growth is still flourishing, stagnation and uncertainty are even more statistically likely to thrive in a climate fueled by rage, dishonesty, and lack of insight.  Sad but true, a yearning for inspiration exists everywhere around the globe.  

 

I believe that market volatility is very likely to persist as a result.  Earnings patterns are uncertain, ambiguity is sprouting, and capital outlays are being held in abeyance.  While imprecise economic factors do not, by themselves, auger for negative market or economic performance, these collective data are producing pressures that counteract upside momentum, thus inhibiting consumer's expenditures of discretionary dollars.  Too many circumstantial events are conspiring to create doubt.  The mental hurdles themselves are almost greater than the quantitative statistics we use to measure markets.

 

Risk aversion is not the same as risk management.  When investors and speculators start to sit on the sidelines there is no recourse other than to wait patiently for their return.

 

 

 

 

 

 

Noticeably, financial averages are no longer performing with the same level of intensity or upside expectation as before.  A sense of plentiful inevitability is gone.  Debtors are reining in their spending and lenders are holding on dearly to their capital.  As speculation diminishes, the timeline of recovery elongates...perhaps even eventually pointing downwards. 

 

Strategy

 

Nevertheless, the questions for our future are not receding into the mist.  Despite declining consumer confidence, we still must deal with the issues of our time: healthcare, water and food scarcity, education, technology, and energy.  For example, given our addiction to fossil fuels, where and when are we seriously going to find and implement renewable alternatives?  Is the threat of global warfare committed in the name of a commodity worth the hazard and sacrifice?  Or can we effectively use technology to find the solutions to shortages and limited access of all the globe's functional natural resources?

 

Support for "green" policies as a concept exists almost everywhere.  But putting it into practice by retrofitting industrial infrastructure, reshaping the job market, managing the initial capital expenditures, etc. are topics which require debate, goal-setting and, most importantly, leadership and consensus. Decisions that we make today involve the union of legal, moral, ethical, and strategic considerations.   It won't just happen on its own.

 

It would be simple for investors to "roll over" and give up from despair.  Or they can focus on the long game and matters which speak about the pain and suffering of countless numbers of other less fortunate persons.  Across all continents, struggles that touch rich and poor alike have attributes that private and public capital can positively expand.

 

Free markets are supposed to be the incubator for such projects, no?  This is neither a red or blue, liberal or conservative puzzle.  More to the point, it should be a market-based challenge.

 

The price and availability of agricultural goods is rising faster than our ability to budget for them.  Patterns of distribution in precious assets are narrowing on a global scale.  No one should ever go to bed hungry or malnourished.  We all live on one planet...our "big blue marble".

 

My proprietary database, ArlingtonEconometrics, has uncovered countless economic and investment opportunities for the future.  For example, we put forward portfolios in Water, Energy, and Global Agricultural designed to profit from the continuing efforts of science and industry to address these issues.  My algorithms reveal where the future intersection of capital and moral leadership can be magnified into profit potential in technology, healthcare, and infrastructure, too.

 

But we also urge prudence in portfolio allocation as we head into this quarter.  An absence of conviction and momentum coupled with an unhealthy dose of acerbic political campaign rhetoric suggest a reasonable dissuasion from jumping into the quagmire with both feet at present.  Trade, interest rate, and macro uncertainty are directly impacting corporate profitability, investment decision-making, and overall market confidence. Therefore, we must be cautiously selective in our allocation choices.

 

If one perceives investing only as a means of aggrandizing net and self worth  then everyone loses the potential also for doing good for others.  Finding that balance should really be our mission as we near year-end.  We cannot expunge the priorities we believed in and transacted at those moments in our past, but we can and do have an obligation to choose that for which we are willing to sacrifice in the future.      

 

 

 

 

 

 

 

Suggested balanced account asset allocation, Q4, 2019

Equity:                40%

Fixed Income:  35%

Cash:                   25%

 

 

 

Market Commentary for the week of September 16, 2019

The how and why

When, and how, does the volatility in financial assets come to an end?

Obviously, no one knows the answer to that question.  But what we know is that several factors play a role in inducing market discomfort and/or perpetuating it.

Rather than ascribing blame to these items (such as, "the Federal Reserve Chairman is bad" ) let us acknowledge that a broad tapestry aligns at certain times either to produce enormous euphoria for investors or great pessimism.  In either regard, the market's responses have as much to do with how we react to these statistics, how we feel, as to the digital data itself.

In a way it's a shame....although human nature, nonetheless.....because trends, cycles, and statistics are the amalgamation of information plotted on a curve.  That simple.  How we react to these graphics says as much about us and where we are in our life's station as the integers tell us.

Which leads me to the primary reason for volatility in the financial market at this juncture....confusion.  Yes, certainly there are currency wars, and stock market bubbles.  There are interest rates, housing starts, employment data, and corporate earnings.  But not one of these data points alone can create 3 percent declines or spikes in the Dow Jones, or justify a panic more so than investors who are looking for a reason to jump ship...something they may have suspected and harbored in their psyche for much longer than one Tuesday afternoon in August.

Humans value their core beliefs.  For a variety of reasons, as many as there are investors, our core values and objectives weigh heavily upon our decision-making processes.  Stuck between holding firm to one's beliefs or risk losing a lot of money, it is no wonder that panic ensues, usually ascribed to a "he said this...", or "the economy did that..." assertion reported on television.

For the first time in many years, buying on dips seems like one of those losing propositions.  No matter what stock, which sector, the landscape is currently littered with failures and trends run amok.  Therefore, a presumption pervades that all is wrong, there is no bottom in sight.

Reasons for hope

The remarkable thing is that these negative attitudes feed upon themselves, powerfully enlarging the trend's negative trajectory even though a majority of the facts says otherwise.  And when the selling begins it is hard to stop it.  Despite "strong" economic numbers the markets (stocks and bonds) seem destined for a protracted period of uncertainty because of our inability to control our emotional responses.  I have said many times in these missives about incentivizing economic activity, "you can lead a horse to water, but you can't make him spend!"

The good news is that the decline in financial asset valuations is not precipitous nor catastrophic.  If anything it was predictable, as this author and others took a look at elongated upside price patterns of the last few years and bemoaned unbridled and unrealistic ceaseless optimism.

Volatility is what markets do....they bounce around a lot.  But the current declines, like all cyclical phenomena, have an expiration date, and eventually will reverse course once again   Furthermore, the best clients, and the best money managers, navigate these peculiarities of multiple market cycles by utilizing methodology, process, and strategy to exploit any inefficiencies of short-term thinking while creating positive competitive alpha over the long-term.

Market Commentary for the week of August 26, 2019

Self-fulfilling prophecy

Look!  Up in the sky!!  It's a recession.  It's a slowdown.  It's a blip.

Yes, there has been a lot of consternation in the last few weeks amongst politicians, retirees, investors, and business owners over trade wars, tariffs, corporate earnings, currency devaluations, and interest rates to determine whether or not we are headed into a dreadful and catastrophic reversal of fortunes.  No doubt that trade and macro uncertainty is causing a “pause" in the market's thinking, making for a more conservative climate.  Are these issues, however, sufficient to cause a massive bear market and recession going forward?

Ok, let me be the first (?) one to say it: believing, as I do, that all things in life are parabolic (quantitative), there is no question in my mind...or my science...that the global economy and the financial markets are fated to be headed in the opposite direction at some point  in the near future.  The issue is whether it takes on a magnitude of despair or merely pause, and whether it constitutes not only a change of fundamentals but a reversal of positive psychology.  I have written extensively about my views anticipating a negative turnaround in several "linear" or excessive trends that have persisted for nearly a decade.  I am not ready, however, to declare that the economic bull is defeated.

That also doesn't mean that private capital isn't now or will not be in the future essential for investment in solving immediate and long-term issues such as global water shortages, hunger, infrastructure decline, territorial security, medical pandemics, technology, and renewable energy.  That list, right there, is sufficient to dispel any notion that everything  is going to hell in a hand basket, and that we need to abandon all money activities for the future.

But I realize that each and every time you, the investor, get your monthly portfolio statement, and it shows a reversal of your gains (you call it a "loss"), that it is shocking, disturbing, and terrifying.

So, which comes first...a decline in the "averages" followed by a recession, or does the recession creep up on us (as perhaps it already has) causing a decline in investment valuations, confidence, and activity?

The answer is: "yes".  It's really a little of both.

Which came first?

My readers, specifically, understand that in a world of statistical probabilities, as things go up, their relative strength potential for increase begins to wane until such time as the trend expires and reverses direction.  Strangely, in the parlance of statistics, the more something goes "up" the less potential value it retains, while the opposite is true: as a security loses value it might be  of greater upside potential when the downtrend terminates, as long as the axis of acceleration remains on a bottom-left to top-right continuum. The timeline might be weeks, months or years, but all trends traverse this parabolic course....birth, life, death.

Of course, not all trends or sectors are correlated in such a way that they move contiguously with one another and in perfect rhythm to everything else around them.  Thus, portfolio allocation by sector and asset class is designed to minimize the effect of following one trend only, and helps to deflect the magnitude of this chicken-or-egg conundrum that the markets are presently wrestling with.

Nevertheless, it is futile to stand in front of an avalanche or to try to roll a boulder up a hill.  For that reason one must have a sense of timing, patience and realism.  No portfolio will go straight up.  One should do one's methodological best to mitigate the effects of a trend in (downward) transition.

Absolute skeptics of the whole process should probably not even be in the investment game.  It is, after all your money and if you cannot tolerate fluctuation then I would proffer that there are less volatile...but perhaps less rewarding.... alternatives for you. Reversals are a part of the investment dynamic.  Anticipation, methodology, and prudent man execution are the best antidotes for what happened last week.