Market Commentary for the week of February 11, 2019

High hopes

Last week's basket of data was full of clues about the future of the financial markets.  We observe, for example, that the hangover effect of the long-running stock price expansion was dramatically harmed by a slowdown in the rate of acceleration of earnings reported during the December period.  This created uncertainty and the biggest decline in equities for any December in almost a century.  The uncertainty might have continued into the new year, but valuations were just too compelling not to be a motivating factor for January's (also) historic rise.  My concern is that expectations are once more becoming unrealistic, setting the stage for these disequilibrium events to become commonplace.

It goes without saying that since the US S&P hit its all-time high in October of last year, global and domestic markets have been in a disappointing correction.  The question has shifted from "how long can the markets sustain an intermediate upside advance?"  to "for how long and to what magnitude will the contraction last?"   Clearly, the veneer of confidence has been pierced.

Metaphysical certitude is never achievable, so the next best thing is to refer to a process of execution disciplines from which to divine the appropriate answers.  And even there we have no guarantees.  You know the old joke: if you gather 9 economists in one room, you walk away with 10 different opinions!!

Perhaps the best way to attack this analysis is to look at what is happening around the kitchen table....

Even though employment numbers are improving, discretionary spending and household savings rates are advancing less robustly.  Historically, full employment emboldens the consumer and corporations to spend more money.  But in today's instance inventories are flat, savings are low, and liquidity, where it exists, is being hoarded.  The rise in interest rates during the past year has added a marginal burden to those who borrow, affecting the potential of future corporate and personal capital expenditures.  In other words, there exists a threat to earnings patterns which could slowly slip into the performance of consumer and financial markets later this year.

Strangely, the consumer has not even been the primary engine of this latest economic expansion.  Since the Great Recession(2008), a significant portion of the recovery in the economy had been artificially manufactured in the accounting departments of corporations and financial institutions: stock buybacks, balance sheet manipulation, personnel layoffs, cessation of hiring and research.  The retail investor had been tapped out and exhausted long before the rally even began.  To this day, a great debate rages about whether or not corporate emoluments have served the best interest of the economy.

Given that we have achieved over eight years of tangible recovery, we must thus look at the recent past few months of economic and market activity as the "right hand side of the parabola", an extension of a market capitulation that I predicted months ago.

Going forward, I would expect the financial markets to take on a more "technical" staccato orientation, yielding to short-term profit taking when valuations rise too quickly, and using declining profit or price projections as an opportunity to buy recognizable names at discounted valuations.  The Fed has already eliminated its impact upon interest rates with a declaration of patience for the foreseeable future, so our focus now turns to inventory expansion and production numbers which, thus far, have been non-compelling. 

While fundamental analysts tend to see things as either black or white, supported by data or not, quantitative strategists always refer to things in a relative context.   That is, data is merely a snapshot of events in transition, up or down.  I look at numbers in directional frames of reference, not as an absolute performance integer.  So, a "quant" would say that when events are getting bad, they one day must get "better".  Similarly, as things reach an apex of performance they must ultimately recede.  Shocking, I know.  But that is how statisticians think. 

I remain fully invested, within the range of risk tolerance our clients prefer.  The news is benign, if not lukewarm.  The Fed has done its job for now.  As evidenced by the mighty swings in market valuation between December and January, a "strategy" of trying to time the market (selling when it goes down, buying back in as it goes up) is futile.  An important question remains whether corporations will step up and address issues beyond merely returning earnings to their stakeholders, and take aim at doing good for the long-term.  In spite of record market highs, there still remains a gap in the breadth and diversity of successes at all strata of the populace.

Before we place an unconditional bet on this market, that there are no lingering doubts about the upside sustainability of stocks going forward, I would have to see greater confirmation that the "relative strength" integers of the current cycle have receded enough to make the probabilities of advance nearly certain.  Until then, we proceed with caution.

Market Commentary for the week of February 4, 2019

Digital conundrum

As the first month of this new year comes to a close there is one thing Wall Street observers might agree on: these times are, indeed, baffling.

The US markets are coming off their best gains in January in 30 years, following their worst December losses in over 80 years!!  However, the financial news hasn't changed much: employment continues to rise (for 10 consecutive years), wages are "modestly" catching up to cost of living expenses, GDP is marginally increasing year-over-year, and certain sectors (renewable energy, biotech, aerospace, e.g.) are poised for decades-long expansion and innovation.  It would be premature to conclude that the corresponding global financial landscape is a calamity. Nevertheless, there are a significant number of psychological hurdles one has to deal with just to maintain assurance and identity with one's longer term strategies.  For some reason, it seems as if the rules of the game are changing, making it even more difficult to "feel" investment momentum when the largest slumps and the biggest gains are all jumbled together in a very constricted timeline intra-day and inter-month.

Finding attractive investments will require more patience, even though "bottom-fishing" might seem like the right thing to do.

One of the more devious influences upon this draconian type of investing is the internet.  More specifically, the proliferation of instantaneous news and data that throws professional investors into a tizzy, and overwhelmingly frightens the average investor by its magnitude.  Experts and experience will tell you that mental lapses and emotional decision-making always lead to some kind of investment mistake.

So, do we ignore the internet... or banish it altogether?  Of course not.  Information is the fuel of the Street.  It can be, in fact, the magic bullet which unlocks the nugget of advantage that one investor develops over another.  But data which is hyped to excess or misunderstood is the existential threat.  Soulful processing of information is what turns a mechanical tool into an art form.

As our delivery systems have become more prolific and sophisticated, their imposition upon the human element (and forward looking, long-term planning) has become more deleterious.  Human interpretation of data is the starting point of innovation and strategy.  The removal of the human form should not be the task of our computers.  Rather, they are but one element of the palate from which we, ultimately, make the final decision.  Volatility, uncertainty, and impulsiveness cannot be eliminated from the investment universe.  But we must ensure that the one pulling the switch is the person behind the machine....not the machine itself.

A question of choice

There is an old phrase in golf: analysis breeds paralysis.  Sometimes, the speed with which investors are being asked to make investment decisions shakes their nerves to such an extent that they don't know where, or when, to go!  They are forced to compartmentalize data into handy silos that meld well with their existing beliefs.  As with everything else in life, explanations are divided into neat little subsets of preference, designed to make us feel comfortable and less stressed.

Thus, the division of the markets into this side of the debate  or that one  influences greatly the buy and sell decision-making process and daily trading activity.  The source of information (computer, media, hyperbole) is not the end of the trail; it is the origin from which the person  finds the justification for making a well-informed choice.

To be fair, if we don't have objective, logical technologies then we have no way of repeating and executing our respective disciplines to achieve our desired outcomes.  But technologies do not provide the final answers.  Experience and intuition requires time to nurture the information, to massage the nuance, and to process the facts.  Forensics offers us the colors.  The artist paints the precise picture.

There is no way to know whether or not the desired effect can be achieved.  All we can do is to try and be consistent in our evaluation of the data and the execution of our selected investment methodology.  While the landscape and capacities have certainly changed over the generations, what has not changed is our desire to preserve wealth in the face of mounting confusion, measurably grow the value of our net worth, and resolutely accept that a person can most often deal with the frailties of another person better than a machine can.