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.
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