Market Commentary for the week of March 25, 2019

Fortifying...

A decade has passed since the Great Recession of 2008-2009.  In that span the financial markets have recovered, and people have been feeling pretty good about the results they have achieved in their investments.  And yet, a subliminal fearfulness underlies almost all of the success the recovery has yielded.  The "next downturn" is something I have to address in my conversations with clients and the media more frequently than our current annual returns.  Indeed, last week's extreme stock market volatility did little to postpone the discussion.

When, or if, the next market capitulation does occur, it is far less likely to impact the economy as severely as the last one, but no one seems to believe that.

Individuals and corporations continue to have 2008 on their minds.  And yet, to their credit, portfolios and balance sheets are not nearly as reckless as they had been in the run-up to the last recession.  So who's right?

Economic data such as unemployment, wages, and productivity have caught up with or exceeded their levels of a decade ago, offset today somewhat by current end-of-cycle slowdowns in earnings acceleration patterns, regional trade disputes, and international conflicts.  Even so, the fear of a snowball running downhill should be somewhat muted.  Yes, recessions and market pullbacks are costly and painful.  No one denies the herculean task it has been to dig out from the wreckage wrought upon the global economic landscape.  But recovery times should be much quicker this next time around because of precautions having been taken to avert such a catastrophe.

There are no easy fixes that limit the effects of excess and greed.  The best way I know of to avoid portfolio demolition is by sector, asset class, and geographic diversification.  Irrespective of one's tolerance for danger, the best guardian against multiple risk factors is asset allocation.

Consider, our portfolios were at or near record levels of cash right before the 2008 collapse, in response to the earlier half-decade in which our accounts were generating competitive capital gains.  It was a time to pare down the risk-taking, bank our profits, and recalibrate the financial backdrop.  We did not avoid the market pullback altogether, but our clients were spared calamity not only on a relative basis but on an absolute one as well.  Foresight and planning ahead using quantitative metrics allowed us to scan the probability of capital gains from an already engorged stock market and make the decision to back off from full investment.  Did we have too much cash as a result?  Perhaps. But consider any other client who was 100% invested in equities and bonds and the cliff from which they fell.

...one brick at a time

Let's face it, investing does not have to mean embracing  risk...it means managing  risk.  The elusive goal of un-correlating one's wealth- building from the day-to-day exigencies of economic, political, and anecdotal statistics is difficult, but not impossible.

As my investment processes demonstrate, structuring initially from a solid foundation (fixed income/cash reserves) is the most important component to creating risk-averse portfolios.  Imagine the base of a triangle and build upwards from there.  But secure reserves are not simply enough.  There are few "growth" opportunities in cash.  One must also construct supplemental franchises upon the base, which means biting the bullet and accepting growth as a component to the ultimate structure.  One cannot "time" the markets; one must acknowledge that cycles are a part of the portfolio paradigm.  I will also remind my readers that secular (generational) themes such as energy, food, infrastructure, healthcare have staying power and capital gains potential despite their unique short-term cyclical topographies.

A good money manager also recognizes that clients sometimes cannot fully articulate their inner thoughts, speaking in "code" about how they feel about their goals or their tolerances for volatility.  It is the manager's job to construct appropriate lanes to help the client fully actualize his objectives and to sleep well at night.

There is no such thing as a perfect strategy, investment, or portfolio.  There only is the perfect preparation for any contingency that might arise.

Market Commentary for the week of March 11, 2019

East, West....

In last week's commentary I referenced the question I am most often asked this year in the wake of a tumultuous and turbulent 2018, "what do we do from here?"   The answer to that question is equally as whimsical to pin down, but not altogether undiscoverable.  Quite simply, look elsewhere.

Global growth is accelerating in certain regions despite anecdotal evidence that there are tensions and slowdowns in specific areas.  In fact, the reversion to the mean in most economic data that took place towards the end of last year helped recalibrate a number of stock exchanges (and market sectors) which had become extended.  Thus, any predictions downward in GDP are already baked into the equation such that huge discounts in some equity prices now represent potential upside opportunity.  Indeed, the burden of unrealistically high expectations has been tempered somewhat.

Most significant to answering the mercurial question above is to remember where we are in the economic cycle post recession (2008) and to understand that any decade is always prologue to the next one.  While the US economy is unquestionably the engine of the global marketplace, there are opportunities which abound if one widens the aperture of perception to look for them.

Divergence, region, and capitalization are not impediments  to expansion.  They are reasons for it.   In fact, middle tier and emerging market nations will take their place in the hierarchy of capital gains potential and expand faster than the West if exogenous political  and territorial encumbrances can be eliminated.  Bear in mind, there are no absolutes, nor is there any reprieve from short term volatility or setbacks when investing.  But if you are asking "what's next?"  this coming decade and beyond might be an era of international potential, concomitant with the steady leadership of the mature bourses.  It is always necessary to have a long term horizon when playing in the global realm.

Based on my analysis, my belief is that the significant discount at which the international markets are trading (versus the S&P, for example) means that they might have a greater potential in the long term to outperform expectations.  We know that central banks have created a decade (previous) of quantitative easing...low interest rates....which means that all stocks experienced a steady upswing irrespective of prudent corporate governance or not.  There simply was no other alternative at that time to stocks in the absence of high bond yields, so investors benefited irrespective of regional differences.  Additionally, the US dollar, by design or default, rose so much that it muted prospective gains in foreign currencies and stock markets.  The advent of accommodative monetary policy worldwide both leveled and lowered  the potential for divergences, and opportunities, to manifest.  That no longer is the case in my judgment.   

up, down....

The curious "benefit" of a quantitative approach to investing is that the more a phenomenon becomes devalued the greater its statistical potential for upside reversal....given the right conditions.  Remember, you can only fill a vessel to 100% of probability or lower it to zero percent risk, no lower and no higher for either.  Thus, well run international companies which have been devalued in the last decade by exogenous circumstances might in the near future have earnings expansion potential that belies their currently depressed share price.  Once again, these global turnarounds do not happen overnight, but rather over years...and definitely not in a linear pattern.  It is possible that up to 30 percent of our allocations in the next half-decade could center around global and emerging market shares.

Most often, one's fear of the unknown works against him in finding the next solar cell company, or biopharmaceutical leader, or technology innovator.  However, I believe that evolution in global central banks' monetary policies will create more and unique regional potential and an appreciation of which companies could emerge from the emotional and financial carnage of the last decade's recession transition economic policies.

As I have written previously, our investment focus in this realm is and has been water filtration, processing, and delivery:  renewable energy sources; harvesting and cultivating arable land for greater food capacity; biotech and healthcare advances; technology and software development; and infrastructure expansion, including rail, air, and trucking services.

Market Commentary for the week of March 4, 2019

Step off

Last week's market was fraught with newsworthy headlines and unexpected turns of events.  Geopolitics in Vietnam, The US Federal Reserve, earnings disappointments, and the sturm and drang  of the market, itself....all set off reactions that were instantaneous and net negative. 

It's not unusual in today's age to witness investors knee-jerk transacting as if the future is supposed to be a structural replica of the present.  While looking for clues that imbalances exist...enough so that they can pounce upon those moments to create "instant" profit capture...they nevertheless live in a world of rote theories, silo specifics, and prefer the status quo over a longer-term imagination or empathy.

But think about it.  How nice it is to have the luxuries of food in the refrigerator when you need it, medicines to cure an illness when required, gas in the tank of the car, an extra sweater when the weather turns cold.

Now imagine a family who have no such easy access to any of these "conveniences" that many of us assume will always be there.....

That gap in life's circumstance represents the disparity between those who trade in the market for vanity and personal gain versus those social necessities that truly can be created/envisioned by a vibrant capital marketplace.  Ask yourself, "why should anyone ever be hungry, homeless, destitute? "  When we expand our horizons beyond simply ourselves perhaps then we might appreciate the bounty we enjoy and the potential that investing really can bring.  This would stand in stark contrast to the day traders who use trifling percentage points as a barometer of how well they are doing.

Humans have always had an innate desire to help others and to be curious about things that affect everything around us.  It is the nature of our sciences to inquire about how things are put together, can be deconstructed, and reconstituted as an improvement.  Medical science, infrastructure, government, and corporations all benefit when being introspective and imaginative.  Widening our aperture of curiosity beyond ourselves alone broadens the potential for innovation and success.

However, change if it occurs too quickly also engenders a self preservation mindset.  Who wants to sacrifice the affluence they already have just for an altruistic goal?  The next 10 years becomes irrelevant if it means we have to give up something today, right? .  Change upends the status quo, and literally forces us into a defensive posture.  These are contexts of human behavior from which we have historically found no escape.

But the real key to successful investing is to step back and realize that life is always  about change, and in order to profit from those changes we must look at the bigger, longer-term framework.  There always will be transformations to "what we know to be true", even if it represents a temporary burden on the path towards something better later on.  Thus, investors will always fail if they cannot accept the essence of the bigger picture.  The arc of our behaviors is defined by the accumulation of knowledge gained along the way and our ability to adapt to the nuances.

Why invest at all?

Similarly, stop thinking about portfolios as a series of one-off transactions, successes and failures.  I know it is hard to concede, but not every purchase or sale is going to be a blockbuster.  Sometimes losses occur...they are to be expected, even.... and are not always the disasters we are prone to assign.  Tough, patient decision-making is the essence of building a mixture of ideas each of which, when blended with the others, produces a landscape of probable success.

I am highlighting these things because I am witnessing a defense-first  mentality in the market place which is exacerbating all the anxieties and fears we most want to avoid, particularly following the disastrous down-phase in December followed by a manic upside burst during the first two months of this year.  "Why this inordinate volatility?", my clients ask.  And "what to do now?"  they follow.  In fact, I think the data is improving and the prospects for well thought out portfolio modeling is quite invigorating right now.  Perspective and patience are the keys.

The massive gaps in market valuation and human condition are as real in people's minds  as they are on their monthly statements.  But our worries about the future become larger and more onerous if we retreat into ourselves....hunkering down in that self preservation stance.... forgetting that there are other, less fortunate souls who have a harder time dealing with the vagaries of life which we all too often take for granted.

Using capital to bridge those gaps and heal those wounds is a good starting point for building investment success.