Market Commentary for the week of May 20, 2019

E (efficiency/outcome)=T (time) x O (opportunity)

How is it that two investment portfolios, of similar construct and asset allocation, might achieve vastly different track records?  Doesn't it seem perverse that two accounts, both holding similar securities, might be so different that one customer outpaces an annual benchmark while another falls behind?

Perhaps not if you reference for illustrative purposes my rather crude attempt above to help you focus upon the most important element to any portfolio outcome, time.  Admittedly the formula depicted above is neither scientific nor factual.  But it lays out for all to see a critical examination of how and why a portfolio builds wealth.  In fact, I would argue that those components are impactful for almost any endeavor in which one "puts in the work" and expects an outcome as a result.

Let me state the obvious: if one invests immediately ahead of a credit crisis, or a dot.com bubble, or a major tariff announcement...that is, just prior to a huge downside market skid....the odds are that you too are going to suffer a sympathetic negative consequence.  On the other hand, if you invest after  these catastrophic events, and if the market goes on a reasonable recovery pace, then you are likely to participate in the recovery also.

Simplistic?  Of course.  But understanding the obvious...that events tend to traverse parabolic ups and downs....is the essence of being a successful investor.  In fact, a successful anything!

Why should I spend valuable paper, and your time, writing about this?  Because it is surreal listening to people bemoan their fate when the justification and data...what I call "process"...is so clearly right in front of them.  Look, I hate losses, realized or unrealized, as much as anybody.  Last week's intensifying conflict of tariff assessments between China and the US, for example, was an unnecessary exogenous influence over the markets and economy.  There is no question that as a result of these and other factors a significant mark-down phase has already begun comprising most all sectors that reached their all-time highs just several months ago.  Such is the susceptibility of stocks at this late stage in the bull market recovery.

But take a step back and review the fundamental long term arc of the economy and your portfolio, and accept that cyclical phasing, up and down, occurs even when the historical trajectory is comfortably bottom-left to top-right.

 No time to waste

I had a new client ask me recently why it was taking me so long fully to allocate the cash he delivered to my firm.  I explained to him that asset allocation does not occur on day one, nor perhaps in a month or two.  I reminded him that ahead of critical negative inflections it would be smarter to wait on the proper time in each asset class that we were going to execute to achieve his objectives.  Anything "arbitrary", without scientific or quantitative justification, would be irresponsible.

The value of these scientific tools is to imbue each portfolio with essential qualifiers which help to implement a desired outcome.  Thus, these quantifications sort through subjective irrationality to help optimize consistency of performance.

Similarly, operating without a science or methodology (process) creates an unnecessary bias, in and of itself, towards a risk oriented portfolio.

Therefore, as asked above, two portfolios of similar construct and allocation, might be as different as night and day if they ignore the element of time  and the intersection of trends, and other quantitative measuring techniques that screen for very specific return characteristics.

I concede that if anyone were able to divine, before they occur,  every emotionally-driven subjective blunder; every irrational tweet; any politically disruptive declarative judgment; all exogenous news events; he/she would be a scientific marvel, a clairvoyant, and probably lounging on a yacht in the Caribbean right now......

The fluidity and unpredictability of the market's current processes is presenting a very unique challenge to those who are perpetually wedded to a "status quo" mindset. 

Market Commentary for the week of May 13, 2019

Remain in your seats

I think an attitude adjustment is called for.

As I explained last week, markets are always, and most particularly, susceptible to disruptions and tumultuousness when they trade so very close to upside inflection points.  And sure enough, all it took last week was a series of tweets, pronouncements, and threats from Federal officials on a myriad of topics ranging from tariffs to judicial review to set off a panic that shaved several percentage points from the apex of the Dow Jones and a slew of "basis points" from the bond market in response.

But here is the key question: "is every cyclical event that befalls the economy necessarily a bubble, a crash, or a crisis?"

Look, it is normal to have aberrations and swings in economic data, even if they are only inspired by silly rhetoric or histrionics.  There is risk in everything in life, and no circumstance really traverses a linear  reaction when we know that the world is made up of highs and lows tracing a parabolic  curve.  One must accept that fact and embrace the ebb and flow of life's currents.

More importantly, one must decide if they are mentally tough enough to accept the risks that investing represents.  The surest way to succumb to panic is to be absent an unyielding methodology that one has faith in and which best responds to one's ability to withstand those risks.  Remember, it's not the gains you make that solidify a portfolio's progress, it is the big losses you are able to avoid...the kind from which recovery is an insurmountable and time-consuming obstacle.  And most of all, withdrawing from the process altogether is a prologue to fear and failure.  Performance is a long term proposition and not for the faint of heart.

Yes, there are current warning signs which might inhibit the market's unbridled journey upwards.  For example, the public's obsession with interest rates is forcing investors literally to micro-manage their portfolios unnecessarily.  A fascination with the Fed's cash reserve balances becomes the precursor to economic activity that hastens a staccato pace of trading and an overabundance of crisis-mode manipulation.  It is wrong to affix a binary choice to those kinds of data such that the nuance of investing becomes entangled with instantaneous rebalancing of portfolios or, worse, selling everything to avoid the news at any cost

Fortunately, prudent methodology can help to mitigate the challenges of understanding micro data while still acknowledging that fluctuations happen even when the trajectory is correct.

Wait for the captain's instructions

It is fruitless to try to predict the actions of the Fed or global central bankers.  Suffice it to say that stocks are at or near record highs and bond yields are at or near historical lows.  In each instance, a reversion to the mean...away from the maximum extreme....would not be a surprise, nor a catastrophe the kind of which is being portrayed by today's activity and behavior.

Anything and everything is possible, but a regression back to a recession is not the most likely scenario.  Real bubbles are usually the result of excess....and few would say that, with the exception of the S&P, the economy as a whole is in an excess.  That type of leverage is in the rear view mirror.  Nevertheless, brace yourself for more frothiness as a result of political posturing and other "exogenous news" events that capture the imagination of the media, pushing aside the real underlying story of the global recovery and market success.  

However, one of the most insidious historical changes that has  taken place is the omnipresence of the internet and access to information instantaneously through the media and other technologies.  A preoccupation with this thirst for news influences upticks and downticks in an unhealthy way, and sometimes is irrelevant to the real situation on the ground.  Certainly, it is useless for the "average" investor to be stressed by every nano-bit of information because it causes too much anxiety and has the potential to derail even the most steady of portfolio progressions.

Market Commentary for the week of May 6, 2019

At the top

With the equity markets trading near the top of their 12 month range, some experts are now reversing course and warning of a downward turnaround in financial fortunes.  While trading near any apex might become a statistical inflection warning sign, I am downplaying the certitude with which the naysayers are speaking.  Besides, I almost always proceed with caution when building portfolios, even in up-trends!   That's the only way I know to mitigate unusual news events that might negatively impact performance.

But in today's instance there is simply too much history and momentum abounding to call outright for a true "reversal".  Short term corrections and cycle capitulations are another thing altogether.  But, again, not likely to derail entirely a decade of forward economic progress.

That having been said, the business cycle is also moving into a late-cycle continuum.  Characterized by slower profits and moderately higher interest rates this next phase will be defined by a more hierarchical structure in which leaders outperform and laggards might possibly disappear altogether.  A recent spate of retail store closings and bankruptcies is indicative of that fact.

More restrictive bank lending policies exacerbate the distinction between accredited borrowers and those falling behind.

A decade from now

Under current market conditions I would find it beneficial to diversify into short term yield instruments.  Besides the obvious benefit of using interest rates and dividend income to buttress portfolio returns, there is also an opportunity to "lock in" downside valuation protection as well as sequestering equity profits won during the past quarter.

Investors always seem to worry about whether they have enough  or have earned enough  from their portfolios.  It's human nature.  Diversification answers a multiplicity of those questions by broadening the portfolio building process beyond hyperbole, hunch, or conjecture.  Process orientation is always preferable to outcome orientation.

Those portfolios that distribute across a spectrum of asset classes are more empirically successful at weathering the inevitable ups and downs of cyclical phases.  My clients have a clearer anecdotal understanding than most of how they have benefitted from that fact.

The long term

A decade removed from the global recession, economies are slowly building a foundation upon which sector rotation and asset allocation can succeed.  It is becoming easier to isolate a handful of industries and business segments that are separating themselves from the pack.  Biotech/healthcare; infrastructure; technology; food, water and agriculture; and energy  are the obvious secular winners of this and the next decade.  The key to managing these segments successfully is to underweight those silos in which underperformance is noticeable and not to try and "fight the tape".

When imbalances in earnings growth and profitability are pervasive it is probably a good thing to avoid conjecturing on the where and when  of possible speculative recovery and to go where performance is currently more obvious. 

The most compelling issue surrounding portfolio allocations, however, is not profit growth, nor is it a concern about the lofty apex of price performance.  The real worry for me is the total disconnect between the market's performance over the past decade  and the perception that the decade was a total loss for some others.....what many refer to as" the wealth gap".   The risk that overhangs the economy going forward centers around how expectations about one's future have become so muted...and the fissure between those who "won" in the last 10 years versus those who failed to keep pace.....that even the most compelling evidence towards financial market participation is being disregarded.

The balance of the remainder of this year might possibly induce a range-bound hesitancy to acknowledge investment's true potential, which, I believe, would be akin to throwing the baby out with the bath water.