Market Commentary for the week of July 29, 2019

Mission: Earth

As an asset allocator I rarely see things as a binary choice, but rather as a grouping of probabilities....overvalue/undervalue, lagging/leading, interest rates (bonds)/equities, etc....which heightens the challenge but, ultimately, enhances the portfolio security and reward.

This type of thinking helps me to evaluate when or how to refocus our client's risk objectives, for example, to liquidate  expansive, and expensive (!), technology shares before the dot.com crash or increase bond holdings in the 1990's ahead of secular interest rate declines.

Thus, our conviction levels are always “positive" even when the data might be indicating negative potential ahead.  In that instance, we will factor in those unconstructive influences to arrive at a more affirmative action plan.

This work is performed daily, but not to the exclusion of our macro long-term objectives.  It is simply impossible to "time" the markets exactly.

Right now, it is significant that in the face of extraordinary headwinds the sum of the parts remains more or less bullish, with an eye on how well and how much more the global economy has to run.  Of course, one needs to be careful not to conflate economic activity with the gyrations and “parallel" direction of the market.  They are not directly correlated, nor should one assume that specific, strategic sector allocation is the same thing as abundant confidence.  Nevertheless, my view is that several sectors are in an outstanding position to gain traction and to push towards new levels of upside valuation, today and decades in the future.  It certainly does not appear at this juncture that the global bourses are ready in synchronicity  to recede into bearish territory.

The markets deserve the benefit of the doubt, reservations acknowledged and notwithstanding.  While there is always evidence of selling pressure “at the top" there is also sufficient cash on the sidelines and levels of interest in making money to quell the worries and to fill in the valuation gaps.  As noted, we are always more aware of our macro mission when it comes to asset allocation and portfolio expectations.  While it would not surprise me if the markets went into a period of price contraction, I am not yet willing to concede to a bear market bias.

Worried?

That having been said, it is remarkable that the current bull phase is over a decade old.  There is always a full schedule of things to worry about, not the least of which is the volatility and unpredictability of our politics and the mistakes that can be made out of pride and ego.

Capitalism is not broken; the way we execute it sometimes is.  The globe has plenty of water, food, minerals, and wealth.  The issue is how we choose to allocate these precious resources.  Every system can be improved upon.  We, the people, and our leaders, must decide when, where, and how we choose to treat everyone else on the planet.  A hierarchical structure is not anathema to social development, but surely works best when even those at the bottom of the rung are well treated and respected.

No one wants their wealth and assets legislatively “stripped from them" or shared, or given away.  But one cannot deny that lack of access might lead to market disruptions and economic inequality that could affect the trajectory of social and moral evolution.  We are already witnessing social turbulence around the world as a result of inequitable decision-making.

The season is ripe to focus politically and economically upon eradicating hunger, building infrastructure, eliminating disease and poverty, enabling entrepreneurship and education, and  sustaining stock market and wealth-building activities.  Win-win for everybody. 

Market Commentary for the week of July 22, 2019

Sticker shock

Global dependence upon low-priced fossil fuels has become something akin to an economic "given", one, unfortunately, that doesn't draw enough attention from market watchers and professional analysts.

The world's appetite for fuel at some point is going to exceed our ability to produce it.  Major discoveries in alternative sources are a long way from being implemented.  These facts make the world less stable and susceptible to political deal making for expediency sake.  While the globe's consumption of fuel is revving at an extremely unsustainable rate, renewable industries' motors are stuck in the slow lane.  In fact, the energy infrastructure isn’t sufficiently mature enough to keep up with our appetite for product or to transition smoothly to alternatives.

Curiously, globalization and commercial trade in the last 50 years has, for the most part, alleviated some of the stresses placed on the fuel industries, despite risky political outcomes, by turning nation-states into indispensable partners.  Today, however, the drumbeat influences of nationalism and isolationism are changing our balances of trade and hastening a decline in cooperation and research and development when it is needed the most.  As in prior economic cycles, the allure of alternative sources....and putting them online expeditiously....is being quelled by cheaper fossil fuels at present.

While there has been meaningful conversation about migrating toward alternative technologies, the switch is in the distant future.  Finding and implementing these alternative sources will only ramp up demand for energy consumption when we really need to apply the brakes to runaway wasteful usage.

Over the next generation populous nations, such as China and India, will exponentially suck up increasing amounts of global energy product.  That demand will surge even more thereafter.  Together with similar trends across all the globe's emerging populations and you are now talking about a compounding of a problem that only peripherally has a solution today.  Such amplification of demand forebodes higher prices for energy in the immediate future.

Adding to the uncertainty in this discussion is a greater instability in political speech and inflammatory rhetoric between nations.  We are witnessing an increasingly harsh retreat from decades-long cooperation and "globalism" which is creating a hoarding of territorial resources and shortages in regions that are not natural producers.  Radical governments are exerting greater/tighter controls over their supply chains and bringing fewer resources to the marketplace.  Time, and arrogance, are the enemy of less expensive fuel.  One can only imagine the extreme situation...a major supply disruption occurring out of spite.

Losing "energy"

The reason that all this matters, whether the topic is energy or technology, healthcare, food, water, etc, is because financial markets currently have become too territorial, too proprietary, in a world that, like it or not, has become more interconnected, more dependent upon the cooperation of science, government, and the general public.  At the end of the day, there is no S&P market, no Dow Jones market, nor a DAX market  or a CAC market. 

Instead, there is a single globe, spinning around on its axis, with limited resources to go around for everybody....rich or poor. 

The art of investing is to seek out circumstance for an investment market  that crosses all borders, all political convention, all time zones, all nations, and directs those resources towards, yes, making money.... while still solving the important issues of our time and beyond.  Sometimes, being able to see the forest for the trees removes the distortions that can occur when we intensify raw emotion and minutiae that cloud our longer term perspective.  Having a framework from which to parse the finer points from the big picture is much more effective than spinning one's wheels constantly...and accomplishing nothing.

Hunger doesn't stop at 4pm, Eastern.  Poverty doesn't discontinue at 4pm, Eastern.  Bridge and road infrastructure doesn't improve at 4pm.  Cancer and other severe illnesses don't recede at 4pm.

Investing....really investing for the welfare of our future....also isn't an activity that should cease merely at the stroke of the 4pm closing bell.    

 

Market Commentary for the week of July 1, 2019

Buckle up

And so, the most obvious question is, "has the recovery finally to come to an end?"

 

It's not surprising that, even after having achieved overwhelming portfolio success and personal wealth, many still feel as if they are not yet secure enough to take a deep breath, relax, and enjoy the windfall they have achieved from investing during the last decade.  This, despite the fact that they were fortunate enough to have lived during the nation's most expansive and longest-lasting economic boom in the last century.

 

Strangely, the longer the expansion lasts, the more people become convinced that the end is near, and a recession is inevitable.

 

What are the reasons for such pessimism?  It could be that the memories of previous "generation-specific" collapses...like the dot.com folly of 1999 or the Great Recession of 2008.....are piercingly imprinted on the brain.

 

But while the expansion might be in its later stages, there are critical factors which make its potential fall dissimilar from other economic dislocations.  I do not dispute that the recovery is getting extended nor that the "right side of the parabolic curve" is an inevitable outcome.  But we believe that the severity of a capitulation could be significantly less earth-shattering than many are expecting.

 

When citing current financial integers as justification for a market collapse, experts point to unimpressive earnings projections, yield curve inversion, political tensions and the breadth of wage inequality.  Indeed, stock prices have multiplied too quickly to maintain, and price-to -earnings (P/E) ratios are vastly bloated.  These data, alone, stoke the fears of financial ruin and foretell, for those who subscribe to the notion that good times are likely to end.

 

We know that all cycles ebb and flow to a specific pulse.  That is the basic tenet of quantitative methodology.  Peaks precede valleys, and valleys inevitably lead to upswings.  But when the next downturn occurs....and it will occur...does it mean the end of the party, or just a temporary and necessary lull before the next cycle commences?

 

Markets

 

There is a school of thought that believes that the bigger the upswing, the bigger the downward response.  However, history has shown us that while nadirs and zeniths interchange, they are not necessarily of co-equal duration or magnitude.  In fact, the historical diagonal of the financial markets always seems to lean from a bottom left to top right axis of ascent that never varies.  In other words, reversion to the mean  is not such a bad thing for those who invest and are looking to take advantage of buying opportunities for the purpose of realigning and rebalancing risk.

 

In particular, while we have already acknowledged that this bull market is long in duration, its breadth of participation is actually quite shallow.  Ask your neighbors if they feel secure or "wealthy" and a majority might tell you "not completely."  Real income growth, while improving, is not happening for everyone nor certainly at a pace at which everyone has benefitted. Concurrently, retail spending and consumer confidence are only moderately emergent.

 

These measurements, and others, do  matter because they operate not in a vacuum, but in the real lives of everyday citizens.  The onslaught of ubiquitous news and information technology rewards everyone with the kind of stimulus...both positive and negative....that keeps nerves constantly in a state of flux.  Consider that in the last 20 years the proliferation of technology has changed the internal dynamics of recessions and bull markets from something you read about in yesterday's newspaper  to something the pundits...and your neighbors and friends....are predicting will happen tomorrow!!

 

We know also that if a recession were to occur today that it does not have the constituent elements of a dot.com internet bubble nor the excesses and greed that lead to a housing/credit crunch.  Let us remind ourselves that all market reversals are preceded by a bull expansion.  We stated that above.  And while earnings are weakening in the face of tariff wars, geopolitical turmoil, and uncertainty about the future, the doubters today are living in a vastly different world than the one we inhabited 10 or 20 years ago.  A build-up of risky imbalances does not persuasively change the dynamics of the recovery or the future of investment potential going forward.  With the exception of political uncertainty, external shocks have already been baked into the market's equation.  We will not be as easily caught off guard or unprepared for market disturbances as we might have been a generation ago.

The likelihood of an unexpected bubble bursting is quite low because there are fewer unknowns in this age of continuous information.

 

We should also acknowledge that simply because the current recovery has lasted nearly a decade that it should mean a capitulation will also last equally as long.  While it is understandable that pent-up fears about the market's progress are deeply held, some of those fears reflect more about our memories of recessions in the past than indications are about the future.

 

In truth, the structural imbalances that led to past collapses are not indicated by the data we have today.  The housing market is robust, albeit contained, and certainly not in a bubble fueled by excess and illegal lending practices.  The technology boom is no longer in its infancy as examples abound about how its influences permeate throughout the globe.  We welcome, too, the current discussion about self-regulation and governance amongst all new technology and information providers.  Finally, inflation is not the worry that it once was thought to be, which incentivizes global central banks to re-think their strategy about tightening the money supply or limiting spending.

 

Conclusion

 

In no way does our enthusiasm expressed in the previous paragraph diminish potential warning signs about the road ahead.  In fact, we have been actively rebalancing our client's portfolios in the last few months to lock in existing profits and to take the measure of alternative strategies that are available.  The level of global debt incurred during the recovery is a potential impediment that deserves our attention.  Hopefully, debt levels and leveraging will be uppermost on the minds of our political leaders as they shape tax and fiscal policies for the decades ahead.

 

Accepting that cycles are a part of the investment/economic paradigm is the first step in mitigating worries that precipitate knee-jerk behavior or unsavory thoughts.  One cannot become paralyzed from acting upon the myriad number of real social and moral investment opportunities that are yet to be fulfilled in areas such as healthcare, energy, agriculture, infrastructure, and technology.

 

Buckle up, enjoy the ride, and get ready for what comes.

 

 

 

Suggested balanced account asset allocation, Q3, 2019

Equity:                34%             

Fixed Income:  41%

Cash:                  25%