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.
No comments:
Post a Comment