Market Commentary for the week of April 22, 2019

First things first

The name of the game is "risk management".

First and foremost, confidence and outcome are birthed from process.  Successful capital gains most often derive from a strict adherence to methodology, principle, and discipline.  Worrying about the outcome is akin to a golfer standing on the tee with water on the left, trees on the right and "freezing" with paralysis.  Building portfolio alpha is about laying the groundwork beforehand and then executing with self awareness and confidence.

I worry about the inundation of hyperbole-driven products that permeate the financial market's landscape when expert chatter seems to give the impression that" traditional" investments may have already succumbed to a lack of momentum, as it seems now.  The global marketplace, littered by examples of tribalism and political uncertainty, is still fertile ground for potential innovation in sectors which morally exploit the remediation of societal ills for decades hence.  Consider, I submit, the enormous capital gains (and social power) that might develop from bioscience research; infrastructure redevelopment; hardware and technology innovation; alternative energy; and agriculture modernization.  Let's substitute science and common sense into our vocabulary versus hyperbole, irrationality, panic, and speculation.

The world is dangerously close to appearing tone deaf.  Despite nearly a decade of post-Recession gains, the markets seem more disparate (by region, territory, political affiliation, or natural resource centralization) than periods earlier in the last century.  The question to this observer is not whether we can sustain recovery, but whether we can sustain social cohesion and investor confidence as the gaps between these basic ancestral needs widens.

Take, for instance, the case of trade and geopolitical advantage.  What used to be assumed as linear has now become hierarchical.  He who has the most keeps the most.  As if by design, the world has morphed into a have versus have -not  marketplace.  Has it always been so?  To varying degrees, of course.  But the enrichment of some at the expense of the many is at a level which today threatens the flow of goods, capital, and opportunity unfairly.  Any vigilante who abuses the marketplace for avarice and proprietary gain fails to grasp the concept that we all inhabit the same planet and what affects one affects us all.  Climate, hunger, and the monopolization of wealth would be primary examples of these data.

It is striking that as the economic recovery burgeons still only a portion of the population worldwide is keeping pace or accelerating at the same rate.  It is also far more likely that the increases in wealth are taking place in urban areas, while rural segments are stagnating.  For too many, "topline” economics are not matching anecdotal "real life" practice.  The financial markets pay too much attention to media hype, talking heads, and celebrity film festivals than they do to everyday kitchen-table experiences.  The clearest signal of these imbalances is how large the profit magnitude is for the richest corporations versus the margins for small business.

Who's here for the duration?

In last week's edition I referred to a sense of dread...perhaps boredom, even....that many feel about their future.  Clearly, the financial markets need to do a better job of encouraging capital to flow in ways which inspire the dream that life will be better from one generation to the next.  Thinking about short-term profits and "rolls of the dice" do none of that.  If you're already rich, then disregard the previous paragraphs.

The absence of empirically larger consumer spending and decidedly wider corporate capital expenditures becomes the basis of a self fulfilling prophecy.  I am worried that gold speculators, energy speculators, investment banking junkies, and merger and acquisition mavens think that the immediacy they respond to is the same thing as investing for the long term.  In the past few months these surrogates for traditional asset allocation models have proliferated to the point that, once again, "Investment -du-jour"  has almost become the motto of choice for Wall Street.

It may sound like it, but I do not begrudge these faddists their profits.  What I do object to are those latecomers who use the engine of capital formation as a replacement for more risk-averse investment strategies.  Because of their one-off style, these speculators are typically the first ones to leave the party when the heat gets turned up, and that's exactly the opposite of what risk averse investors are looking for.

Market Commentary for the week of April 15, 2019

Science, or perception?

How is sustaining a financial rally different from starting a rally?  There are factors which must be present at the inception of a market phase that are dissimilar from those things that keep a rally going.  Ignored amongst all the attention being paid to where we are today...and where we are going...is that nearly a decade has passed and the circumstances and the questions at that time were entirely unusual.

Our changing times today underscore that as market phases mature, the uncertainty actually accelerates.

Think of it this way: at either end of a parabolic spectrum there is no way to go but in the opposite direction.  At that point of conjunctive similitude, "your guess as to what will pop out first is as good as anyone else's".

Thus, quantitative analysis tells us that things tend to bunch up and correlate more directly at inflection points (such as market bottoms or tops) than they do during the phase progressions.  As things advance the correlative disparity between those things that "matched up" begins to widen, exacerbating speculation and uncertainty about what jumps out to lead the pack, what is leading  and what is lagging behind.

As we scan the current landscape, it is fruitful to fall back upon our objective statistics based training.  Removing emotional biases allows this observer to capture a market's inherent numerical value, whereas a more subjective approach tends to produce the kind of paralysis and panic trading style we have been witnessing across the board of late.

As such, I feel comfortable declaring that opportunity persists all across the financial spectrum, even at this late stage in the advance.  The contradictory fear that bull markets are collapsing is offset by improving fundamentals, particularly employment, wages, low interest rates, and business productivity.  In spite of historically low returns on fixed income products, there has been sufficient movement upwards in interest rates during the past year that it no longer is unreasonable to supplement portfolio modeling of stocks only  with short and intermediate term yield investments.  Asset class diversification is at its most optimal point in a decade.

Despite this fact, most portfolios are still equity top-heavy.  I think this is a good time to review one's winners and losers in that realm and to "park" cash in alternative spaces.

Perception, I suppose...

Over the long term, earnings drive price performance.  Although earnings have been improving during the recovery since the end of the Recession, there is a noticeable slow down in rates of earnings acceleration  which might give one pause about how long the pace of growth could persist.  Exogenous factors such as politics and current events are the great unknowns.  Forward earnings estimates indicate that profits will be maintained, but perhaps at a moderating pace.  Vigilance...and sector rotation....is absolutely necessary right now.

Mathematics and quantifiable science aside, my view is that the political overhang is souring investors about their view of the future.  If not bored by it all, they are at least grudgingly playing in the financial markets with one hand while holding their noses with the other.  The peak of their enthusiasm has indeed become muted.  As alluded to above, their fear of history repeating itself (recession, collapse, stagnation) is stronger in some cases than their desire to play in Wall Street's casino.

I have pointed out before that collapses are curiously outstanding opportunities for rebalancing and reassessing portfolios.  Nevertheless, I think that markets are better able today to withstand short-cycle corrective events than in the past.  Certainly, no one wants to see any of those negative influences manifest.  But rather than fixating upon the day-to-day vagaries of current events and circumstances beyond our control, perhaps it would be wiser to widen our aperture of perception and focus upon trends that are more enduring and which pay off more handsomely than "betting it all on black" speculation.  If you believe in the concept of true investing,   then you, too, have no doubts about the success potential of your portfolio. 

Market Commentary for the week of April 1, 2019

The Road Not Taken

 

The forest or the trees?  Macro or micro?  In life, we are faced with interesting decisions constantly.  The big picture versus the many intricate details.  It is not only our ability to solve complex problems that determines our successes, but also the objective processes and subjective responses to their outcomes that often leads to a sense of self gratification.

 

Making money in the financial markets doesn't require elaborate schemes or technical ambidexterity.  One simply has to be patient and ready to deploy appropriate disciplines to take advantage of any inevitable opportunity.

 

Unfortunately, one must also be mentally fortified to deal with unforeseen bumps in the road.

 

Soaring markets are the ultimate reward we all strive for.  Bottoms are the bane of an investor's existence.  "How much better than last year's results can I expect to achieve?"  "If I could only find the secret to investing at the right time, my riches would be boundless."

 

The problem with hoping and praying for endless wealth is that prosperity is never a guarantee; imbalances in life and one's fortune are a part of what occurs.  The ebb and flow of sector rotation is at the essence of knowing how to compete in the financial markets.

 

At their core, my proprietary models are predicated upon earnings, price, credit, and relative strength modeling.  As long as we lead with those primary diagnostic overlays we have done most of the blocking and tackling needed to get the job (capital appreciation/capital preservation) done.  What matters when evaluating the process is that the leaders outperform, the laggards are under-weighted, and the aggregate portfolio return meets or exceeds a subjective quantification  of where the client wishes to be, how he feels about the portfolio, and the longer-term trajectory of the account's alpha.

Markets

 

I believe the most successful of those aggregates are alternative energy, health and life sciences, agriculture and water, and ecology....a quartet of what is commonly called "socially responsible investing" (SRI) silos.

 

These sectors are significant because they combine the primary selection criteria of a quantitative orientation, as well as the "moral and social necessaries" to compete for capital gains for the next decade and beyond.  These sectors provide us with planet-changing potential both for our net worth as well as the good that these nascent industries can perform.

 

The power of an earnings-driven topography is that it enhances the growth potential of the portfolio while addressing the need to mitigate risk when investing in early-stage development.  Remember the dot.com era?  Where were the earnings, and why such hyperbole? 

 

Much of the investing public's recent focus has been upon interest rates and the global central banks that control their trajectory.  At the end of last quarter it was pretty much assumed that the consumption boom of the previous decade was reversing course or, at least, slowing down.  While there likely will not be a continuation of rate hikes to stem an inflationary tide, attention must also be paid to fostering a belief that stimulus and development are vital to geopolitical inclusion.  Developing nations must be prioritized in the expanding global economy, or else the inequality gaps that are at the source of so much social upheaval and discord will widen even further.

 

Sure enough, the landscape of potential purchase targets today is diminishing because the markets have run so far and for so long.  Another "flight to quality" epoch is erupting right in front of us, spurring the sell-off in equities that occurred in the past quarter.  All of our balanced portfolios include bonds of short duration, growth (earnings) equities, and cash, and that is where our focus will be in the next three months.  Using a multi-tiered approach also helps to allay the confusion, fear, and potential for disaster that panic-based investing fosters.

 

The planet is experiencing rapid changes.  Some of these changes are bountiful and some are catastrophic.  Some conditions are politically (man-made) induced, some are organic.  Personality-driven trade disputes...particularly between the world's superpowers....and other regional territorial conflicts sour the taste for consumer sentiment and future corporate capital expenditures.

 

Our analysis points to a fabulous potential for growth and capital gains in the "emerging markets"... a context that can be a breeding ground for innovation in land capacity, biotech advances, water usage, ecology, and technological aptitude.

However, to thrive in a world of change we must enlist the help of all of our resources....corporate, institutional, personal.  All along the way, we must be careful to adhere to "rules" for prudent governance...rules of the road, if you will.  We must also account for differences by region, culture, territory, politics, morality.  What works in one place might not be appropriate in another.  What is commonplace here might be abhorrent elsewhere.  The footprint for success will differ significantly in different parts of the world, but future generations will depend upon our ability today to get these answers right.

 

Our institutions and norms must also be evolving.  What once was an accepted business practice might inexorably be changed tomorrow.  Instead of trying to protect what they once had, businesses must try to galvanize their resources and their brain power to offset current inefficiencies and learn how to profit for good tomorrow.  Admittedly, some of today's businesses will not survive, while other kinds of trademarks will emerge to take their place.  Some of those innovators are not even born yet!  The future lies before us, embrace it.

 

Politics, morality, culture, all play a role in weaving that tapestry.  We know, though, that science and technology are at the core of society's next great discoveries.  Living better; living longer; eradicating hunger; building security....the component parts might be up for debate, but in the end the goal is to bridge the gaps that divide people from each other and which place barriers to a more prolific life.

 

 

Conclusion

 

The markets, today and always, are an extraordinary study in contrasts and opportunity.  The recession of a decade ago is well in the rearview mirror.  Yet, there exists a horrific disparity in the way wealthy people perceive their world and how the poor feel about their plight.  The markets do their fair share of harm by ping-ponging investor's senses when gyrating as wildly as they did late last year and earlier this first quarter.  As I wrote recently, I don't view the integers of the stock market as a performance  barometer, per se, but rather as directional  indicator of what is likely to come subsequently.  Stocks do not always directly correlate to our attitudes, expectations, or behaviors, although each in their own way influences our financial security.

 

It is noteworthy that the transfer and centralization of wealth is becoming more problematic, and that our ability to solve communal problems will depend upon a more equitable distribution of opportunity.  The ratios are becoming so one-sided that lives are being lost for lack of resources, vision, and hope.  We must be more tolerant of each other and recognize that the "other guy" is trying as hard as we are to march forward.

 

Last year, at about this time, we were approaching the apex of a ten year run-up in stocks and economic productivity.  One year later, we are still near some of those parabolic highs, albeit with significantly less momentum and perhaps a wider skepticism about its continuation.  There are significant geopolitical and personality-driven factors that enter into our present day portfolio analytics.....war, regional diversities in affluence, class polarization, monetary and fiscal policy.....enough so that pools of capital become attainable only to a handful.  Sometimes, the divergence between reality and perception requires us to make compromises for the good of the community.  In the course of conducting their affairs business and politics need to step back from misleading the public to understand that solutions extend beyond self promotion.

 

 

 

 

 

 

Suggested balanced account asset allocation, Q2, 2019

Equity:               47%

Fixed Income: 42%

Cash:                 11%