Buckle
up
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%
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