Market Commentary for the week of October 21, 2019

An elusive pipedream

Some weeks are noteworthy more for what doesn't  happen than what does.  Because the end of last quarter was particularly unsettling for equity prices...and our psyches..., last week's meager up and down trajectory should be viewed as a return to normalcy and a more positive development for the financial markets.  No doubt, however, the ongoing drumbeat of tariff negotiations and Mid East war weigh heavily upon the backdrop for further momentum.

At first glance, the fact that nothing new happened last week other than the usual spate of earnings reports, Congressional investigations, and Brexit negotiations offers us a chance to have another look at portfolio allocation for the current quarter.  It is noteworthy that few are running for the exits just yet.  The fact that we had a week without serious rupture is important if you are trying to determine whether to cash in ahead of any anticipated catastrophes or to stay the course.

To be fair, there are so many (negative) exogenous influences we could cite to do exactly the former (cash in).  Science, and valuation, tells us that there will be a contraction in financial markets...we just don't know when and to what magnitude.  All the while, leadership sectors continue to lead (non-cyclical) while the laggards lag (industrial), and the coincidental sectors provide cover for those in-between.

From "30 thousand feet up" the markets are simply reflecting the overall economic trends of our day, including low inflation, diminishing acceleration patterns in corporate earnings, low interest rates, and a disjointed and confused universe of private investors trying to make sense of it all.

The question one must answer from the variables I described above is how to sort through the multiplicity of dissimilar vectors moving in numerous directions to arrive at an allocation that does no harm while still offering a high probability of capital advancement.  Easy, right?

I still believe there is sustainability to the global economic recovery.  Our recommended list of equities and bonds this quarter is a menu of "conservative aggression".  Even though September took a lot of steam out of portfolio momentum, we are now, nevertheless, in an opportunity to add some elements to the portfolio at a less advanced price than earlier this summer.

Averting crisis

I always seem to be urging caution, or so my readers tell me.  Jumping in with both feet...when the market goes up or down....is the siren call for the uninitiated.  However, I have no doubts about the coming wave of prosperity and capital gains in generational, longer-term demographics in healthcare, alternative (renewable) energy, technology, infrastructure, agriculture, aerospace, and education.  These themes would complement any portfolio, at any time.

Case in point, I see too many desperate investors chasing depreciating securities...fishing at the bottom....looking for validation that "if it's cheaper it must be better to own".   But nothing succeeds like success, particularly companies with a history of increasing earnings and share price over the long haul.  Look, the era of "dot.com hype" is long gone.... over 20 years ago (!!)... and not the kind of aggression that is needed for successful portfolio modeling now.

Instead, we should be looking to cultivate arable farmland to feed the hungry, transmitting water assets to arid territories, and developing 5G technology for this decade's next technological revolution.  There are enough public and private companies engaging in these endeavors right now to keep you busy for quite some time.  And more to come.

The factors which inhibit your portfolio progress are your own restlessness  and an obsession with taking chances unnecessarily.  Looking around at what your neighbor has, or is doing, is a recipe for failure.  Nor are there passable solutions to be found from "slick" television commercials hosted by bearded spokespersons and sexy models, "zero commission or fees" offers, or beach house photographs and fancy parties.  No, nothing beats good old fashioned due diligence, process, methodology, common sense....and a bit of luck and good timing.

This is not a time to succumb to hyperbole.  Be secure in yourself. 

 

Market Commentary for the week of October 14, 2019

Cut the noise....not interest rates

With the stock market seemingly floundering "at the top" investors have turned their focus to another easy target, the US Federal Reserve.  The Fed has been on a two year quixotic journey first of raising interest rates at the tail end of the economic recovery to address concerns that the decade-old surge had been igniting inflation, overspending, and borrowing; then lowering interest rates in response even when political (and economic) pressures imposed a "nope, that's not what 's really going on"  reality upon them.

So, just as with the volatility we have seen in equities, the bond market began a schizophrenic  ping -pong match with itself over which data and opinions were real (or sell-able to the public) and which were not.

But, curiously, the indecisiveness has actually fed into its own narrative and created a real problem for financial markets overall.  There actually isn't the type of liquidity (money) to go around that many experts think, nor is there an appetite right now to be a heavy borrower no matter how attractive rates might be.  Just recently the Fed again "cut" interest rates (the rate at which banks borrow from each other over the short term).

But does that rate cut really affect the lending experience or possibilities for the average investor?

The answer depends largely upon other things well outside the span of Chairman Powell's jurisdiction.

Your wealth, not theirs

For one, the real economic output of the global economy isn't as strong as the experts would have you believe.  For example, nearly 2 percent GDP in the US is not catastrophic, but it pales in comparison to earlier economic predictions or where the economy should  be in an environment of low interest rates, full employment, and a record-setting stock market.

Many, including me, expect the data to continue to improve.  But the exogenous political pressures to manufacture low interest rates and expansive borrowing is an exercise in pointlessness.  Are politicians and monetarists pounding the table for what they see, or what they hope  to see?

At a time when interest rates are historically low, the real rate of return  on fixed income assets is precarious.  The 30 year US Government bond rate has been rising for more than two years.  So as the integer value of rates is going higher the valuation of fixed income securities is falling.  The bond market is going through a mini-crisis.  The Fed's influence is not enough to quell market forces that are worried about bubbles, growth, and a dearth of borrowing.

In fact, the short term activities of the Fed did produce a yield curve "inversion" late this past summer....that is when short term rates exceed the rate on longer term bonds.  But that inversion quickly self-corrected back to historically syncopated levels we see now.

With all the political influences upon global central banks it is difficult to manufacture a cohesive strategy which encompasses economics, geopolitics, financial markets and consumer sentiment, thus putting more strain upon the activities of government and business, not to mention Wall Street's speculators and longer term investors.

If the messengers could just quiet the hyperbolic rhetoric for a while, the dust would settle nicely in our favor.  

Market Commentary for the week of October 1, 2019

The Home Stretch

 

 

Leave it to reckless politicians to bring markets and consumer confidence to a grinding halt.  The intractability of their public rhetoric leaves very little wiggle room in crafting together both a moral imperative  and a capital investment scenario  to address the needs of real citizens in a responsible and forthright way.  Efforts to bridge international boundaries between friends, neighbors, and enemies have come up empty because parties and individuals feel more compelled to try and go it alone rather than seek cooperation.  As Rome burns, the fiddlers play.

 

Why such obstinacy?  Because any effort to conciliate with someone else makes our leaders feel "weak"...at least, according to their words and deeds.

 

Energy shortages, weather disasters, healthcare pandemics, decaying infrastructure, pharmaceutical drug price increases, wage inequality, hunger and poverty, will not wait for political theatre to abate.  Their impact upon life today is incalculable.

 

Capitalism without ethics and leadership is a vessel sailing without a rudder.

 

As we tiptoe into the fourth quarter one can almost feel an appreciable nervousness about leaving behind the tumult of the previous 3 months for what is perceived must lie ahead.  Those who thought the market's expansion was long overdue for a correction were ironically "rewarded" for their pessimism during a volatile tug of war in the last quarter.  Indeed, the lowering tide took down all ships....and 401-k's....in the process.

 

The notion that the time was right for a recalibration in financial assets emanates from a philosophical and scientific belief that a market that is built with no constraints upon upwards enthusiasm eventually falls of its own weight anyway.  So why not now?  But to usher this premise from simply being a hypothesis into a scientific rule requires steady and effective economic policy and consistent rhythm, neither of which applies to the present situation.

 

Measurable economic cycles require a kind of capitalism and mindset that can be depended upon to deliver consistent and noble ideas, which encourages a free exchange of goods and services.  As noted above, artificial interference by speech-making or political fiat impedes economies more quickly than the other things about which we worry.

 

Markets

 

The markets have experienced these kinds of crossroads before, and will again.  Ultimately, however, the ingredient most needed to remediate the current climate, this quarter and beyond, is trust in the fairness of our processes and institutions.  Unfortunately, I see that as the most odious of our shortcomings at this moment.

 

Take, for example, the assumption that stocks trade upon the expectations and accuracy of earnings projections.  Anything which stifles an impartial evaluation of such becomes, in itself, the emotional and systemic monkey wrench that grinds forward progress to a halt.  Even when a corporation produces a "better mousetrap", it is likely to fall victim to a stealth trap door when the guidance used to proffer such information is toxic or inaccurate.  You might hear that "interest rates are too low (or too high)".   But it is moral persuasion  and coherent leadership  that opens wallets much faster than anecdotal conversation about the yield curve.

 

This is the kind of moral meaninglessness which keeps people awake at night.  Despite empirical evidence that real economic growth is still flourishing, stagnation and uncertainty are even more statistically likely to thrive in a climate fueled by rage, dishonesty, and lack of insight.  Sad but true, a yearning for inspiration exists everywhere around the globe.  

 

I believe that market volatility is very likely to persist as a result.  Earnings patterns are uncertain, ambiguity is sprouting, and capital outlays are being held in abeyance.  While imprecise economic factors do not, by themselves, auger for negative market or economic performance, these collective data are producing pressures that counteract upside momentum, thus inhibiting consumer's expenditures of discretionary dollars.  Too many circumstantial events are conspiring to create doubt.  The mental hurdles themselves are almost greater than the quantitative statistics we use to measure markets.

 

Risk aversion is not the same as risk management.  When investors and speculators start to sit on the sidelines there is no recourse other than to wait patiently for their return.

 

 

 

 

 

 

Noticeably, financial averages are no longer performing with the same level of intensity or upside expectation as before.  A sense of plentiful inevitability is gone.  Debtors are reining in their spending and lenders are holding on dearly to their capital.  As speculation diminishes, the timeline of recovery elongates...perhaps even eventually pointing downwards. 

 

Strategy

 

Nevertheless, the questions for our future are not receding into the mist.  Despite declining consumer confidence, we still must deal with the issues of our time: healthcare, water and food scarcity, education, technology, and energy.  For example, given our addiction to fossil fuels, where and when are we seriously going to find and implement renewable alternatives?  Is the threat of global warfare committed in the name of a commodity worth the hazard and sacrifice?  Or can we effectively use technology to find the solutions to shortages and limited access of all the globe's functional natural resources?

 

Support for "green" policies as a concept exists almost everywhere.  But putting it into practice by retrofitting industrial infrastructure, reshaping the job market, managing the initial capital expenditures, etc. are topics which require debate, goal-setting and, most importantly, leadership and consensus. Decisions that we make today involve the union of legal, moral, ethical, and strategic considerations.   It won't just happen on its own.

 

It would be simple for investors to "roll over" and give up from despair.  Or they can focus on the long game and matters which speak about the pain and suffering of countless numbers of other less fortunate persons.  Across all continents, struggles that touch rich and poor alike have attributes that private and public capital can positively expand.

 

Free markets are supposed to be the incubator for such projects, no?  This is neither a red or blue, liberal or conservative puzzle.  More to the point, it should be a market-based challenge.

 

The price and availability of agricultural goods is rising faster than our ability to budget for them.  Patterns of distribution in precious assets are narrowing on a global scale.  No one should ever go to bed hungry or malnourished.  We all live on one planet...our "big blue marble".

 

My proprietary database, ArlingtonEconometrics, has uncovered countless economic and investment opportunities for the future.  For example, we put forward portfolios in Water, Energy, and Global Agricultural designed to profit from the continuing efforts of science and industry to address these issues.  My algorithms reveal where the future intersection of capital and moral leadership can be magnified into profit potential in technology, healthcare, and infrastructure, too.

 

But we also urge prudence in portfolio allocation as we head into this quarter.  An absence of conviction and momentum coupled with an unhealthy dose of acerbic political campaign rhetoric suggest a reasonable dissuasion from jumping into the quagmire with both feet at present.  Trade, interest rate, and macro uncertainty are directly impacting corporate profitability, investment decision-making, and overall market confidence. Therefore, we must be cautiously selective in our allocation choices.

 

If one perceives investing only as a means of aggrandizing net and self worth  then everyone loses the potential also for doing good for others.  Finding that balance should really be our mission as we near year-end.  We cannot expunge the priorities we believed in and transacted at those moments in our past, but we can and do have an obligation to choose that for which we are willing to sacrifice in the future.      

 

 

 

 

 

 

 

Suggested balanced account asset allocation, Q4, 2019

Equity:                40%

Fixed Income:  35%

Cash:                   25%