Market Commentary for the week of June 10, 2019

You might recall...

Back in the 1980's...for those old enough to remember....the key word on Wall Street was "globalism".   There were the Korean funds, the German funds, the Australian funds, the European and Emerging market funds, etc.  Name a country and there were analysts, marketers, and salesmen hyping the value of direct investment in various non-boundary-specific paradigms.   All sorts of strategies and product offerings were predicated upon a post- World War 2 expansion and cooperation amongst nations which was, then, a full generation in the making.

Today, the dialogue has shifted dramatically.  Owing to a movement towards fiscal austerity, tribalism, and "patriotism", one more frequently hears about protectionism  and individual country's "rights".  Indeed, and as a result of these factors, global trade is taking a beating right now brought about by tariff wars, escalating immigration concerns, and a declining manufacturing base.

As the rhetoric gets more heated, so too does the damage to a principle now more than 30 years old.

The last few weeks in the global stock markets have been reflective of the changing discourse.  There is no question that the expansion in financial asset valuations has been lengthy and successful, one of the longest in modern history.  But bull markets tend to end not specifically by their own weight but usually by a man-made catalyst that simply confirms the suspicions and doubts within investors that the good times are destined to end at some point, anyway.

And with good reason.  We know that business cycles, like all things in life are parabolic  and always navigate an ebb and flow that can be measured and, sometimes, predicted.  But we also know that, given the factors which govern today's recovery and expansion, there is no real cause other than political hyperbolic oratory  for the recovery to end at this juncture, at this time and place.  The data are shifting, yes, but not to the point that the economy would reverse at a moment's notice.

The implications of an unforced error upon the financial markets would be devastating, as we saw last week when the markets zigzagged recklessly as a result of desperate social media folly.  The prevalence of irresponsible dialogue is strictly a non-traditional way of doing business, which, apparently, fazes some but doesn't bother others.

Nevertheless, it is my job as an analyst and portfolio manager not to try to "fight the windmills" but rather to observe, measure, and to make the necessary course adjustments on behalf of our clients.  Taking a more cautious view, we have been doing just that by buying short-term fixed income with available cash as a buttress against the volatility of the equity markets, and by removing the least likely to perform stocks from our portfolios.

Best options

The challenge ahead is equally as daunting because I still see the possibility of portfolio success as quite high, but the potential for policy and verbal errors is equally as high.  The latest data shows a falling consumer confidence and demand.  As I wrote last week, there are any number of pressing social issues that need to be addressed by public and private initiatives including global hunger; reduction of natural resources (including fossil fuels); failing infrastructure; health pandemics; ecology; water shortages; arable farmland depletion; and territorial security.

Imagine the potential of Wall Street if any one...or all....of these themes became this generation's buzzword, as globalism  was for generations earlier?

The threat to any global ecosystem is not rooted in the fallacy of the concept.  No, the threat comes from an escalating politically driven rhetoric reinforcing a self-fulfilling admonition about unreasonable jingoistic stresses.  Unpredictability, not the underlying data, is causing the current flight to safety.

Market Commentary for the week of June 3, 2019

SRI, redux

It might be premature to talk about a "correction" but there is no question that all S&P sectors have hit a bump in the road.

Following another week of critical declines in the averages, it is becoming more and more important to divert one's attention from the hourly up and down progression of traditional equity and bond trading.  If nothing else, I urge caution about getting swept up by the negative emotion that comes about by an obsession over something for which you really have no control.

I've given a lot of thought and written extensively recently to how investments in socially responsible companies can divert your focus while also returning value to your portfolio.  It's not an idle exercise.

In recent years, younger clients and those intent upon addressing the inequities in global economics have increasingly demanded a spotlight upon strategies that not only can help to achieve their own financial investment objectives but which also directly respond to societal needs such as eradicating hunger and poverty, or developing alternative and renewable energy sources.  And it has been a good fit because I have used my proprietary quantitative tools to explore these very issues since the last millennium.

More importantly, as socially motivated investors become more results oriented, the need to create real portfolio alpha has also become more noteworthy.

The basic problem during the last 30 years has been that most "green" product offerings haven't translated into performance for clients.  Instead, most of these funds have been concessionary at best to the factors that really matter in effecting results for the planet and for clients' grandiose expectations about making money in those industries.

In fact, because of shoddy research or too aggressive marketing campaigns, many of the public offerings in socially responsible funds contain only a few of the companies in this realm in their overall portfolio.  The largest allocations go instead to corporations that pay lip-service to socially friendly practices but have a minimal effect upon the mission's outcome.  Purchasing these products in the past might have been a "feel good" exercise, but has done little in the way of achieving a desired result...either for one's portfolio or the planet.

Indeterminable

So why do I feel so compelled to redouble my efforts in this space?

For one, my research is neither sector nor capitalization specific.  That's good because we enter this project with no preconceived notions about what we will find.  My goal, instead, is to isolate publicly traded issues which fall into a "capital gains projection" grid and whose management and mission has already been vetted for good will and profits in their chosen endeavor.  Only then will I "bunch" these equities into an appropriate basket and title them by their proper sector.  The goal is not to try and fit a square peg into a round hole but rather to eliminate all "holes" (silos) altogether at inception.

Without any predetermined biases we can aggregate the data, then create a macro framework for portfolio positioning.  The devil is in the micro details, and our experience with quantitative allocations hopefully allows us to be more effective in achieving both ends of the client's mission statement.

As with any investment there is always a risk that early-stage companies cannot keep up with a break neck pace of production or, worse, that mature companies grow weary of underperformance in their lower divisions that are not yet mature enough to pay dividends to shareholders.

Of course, this topic is, at its core, quite multifaceted.  If you are looking for immediate gratification or less compelling stories you may not find it in the "future" of mankind.  There are intricate, intensive discussions that have to be had, and which also pose significant unknowns.

A topic not for the faint of heart.