Market Commentary for the week of November 18, 2019

Wasting a good bull market

You are hearing at an alarmingly increasing pace that the Dow Jones and S&P averages are making new high after new high.  This is causing a peculiar panic both for those who are in the market, wondering when they might safely cash in their winnings, and those not yet fully invested who believe that the gravy train has already left the station without them.  With markets soaring, the fear of "missing out" is growing.  There is an old Wall Street axiom which mocks this emotion, in fact.  It is called the Dow Jones Theory and it says, "when everyone clamors to 'get in', that is the time for everyone else to get out!".

As you know, we have been subsisting in a "low interest rate" environment for over a decade.  And while the hope was that keeping rates low might spur increases in borrowing and, thus, more economic capacity, the real offshoot of those policies has been corporate cash hoarding and stock buybacks, margin squeezes for major banks,  runaway record stock market valuation expansion, and near-zero savings rates for average investors.  It is as if once the first dose wore off, the central bankers prescribed a second, then a third shot of adrenaline without diagnosing the underlying affliction.

Indeed, policy makers have forgotten the age-old alternative investment scenario, in which risk averse savers might actually be rewarded for building savings and avoiding speculation in the equity markets. 

Instead, just the opposite has occurred.  And yet, no matter which way policy develops, there will always be criticism from one side or the other that money is either "too tight" or "too available".

Is it possible that a lack of alternative options for investors could actually spawn another market collapse leading to a crisis like the one that led to the recent Great Recession? 

Obviously, no one is hoping for that outcome.  But we know that when price-to-earnings (P/E) ratios accelerate in favor of the "P" some kind of reversion to the mean is likely to occur.....unless, of course, the "E" expands exponentially to catch up with runaway stock prices.

Most analysts are forecasting an earnings slowdown for the next fiscal year.  This means that the rates of earnings acceleration  are not likely to surpass the numbers posted this year.  Despite this, the same forecasters are saying that the global economy is weathering all obstacles and still on course for expansion in 2019.  Indeed, the economy, in the aggregate, is far in front of where it was just 5 years ago.

Lesson learned

My hopes are that an increase in interest rates, at whatever time it might occur, could offer some alternative relief for investors and the markets by eliminating what has been a default argument  for buying stocks.  An increase in savings rates of return might inflict short-term pain on the stock markets temporarily, but align more closely with a competition for your dollars without involving unnecessary risk-taking.

It would provide peace of mind for investors looking to "hold on" to, and safely reinvest, gains already won from the recent bull market.  By drawing out the investment progression for clients by including cash, savings, and time deposits, rising rates mollify the inherent risks of an all equity phase.  By injecting confidence, not just cash, into the portfolio process bankers, economists, and politicians would achieve their end-game to expand capital formation.

Have the central banks inadvertently twisted the landscape by their insistence to "stimulate" the economy?  Clearly up to this point they have not created the kind of growth and savings they thought they would when structuring an artificially low-rate climate, so why not address the savings and confidence issues stalling development which they unwisely overlooked previously?

It is shortsighted to conflate stock market prosperity  with unconditional economic prosperity for everyone.   I have called this the Parallel Disconnect....two economic trends seemingly correlated both in magnitude and amplitude but in reality two phenomena just passing in the night without cohesion or compassion.  The global economy is a highly splintered amalgam of legacy versus innovation.  I believe we are in a fertile period of earnings growth for areas of inventiveness such as biotech, healthcare, agriculture, infrastructure, and technology, if the political will and the moral compass align correctly.

 

Market Commentary for the week of November 11, 2019

The numbers tell only part of the story

A big problem for many investors has been how to distinguish between the macroeconomic backdrop versus the underlying performance of individual portfolios and securities selections.  The result is that they are always in a comparison competition  with benchmarks, valuations, and perceptions that are thrust upon them by a ubiquitous information onslaught.

Many of these information sources are well known media channels of distribution, in print and in video, coming from a cross-section of biases and perspectives that may, or may not, share the same value structure and risk profile of the recipient.

Yes, of course, performance is the "end-game" of portfolio management.  But, on a scale of 1-10 regarding issues about which my clients ask me for assistance, portfolio performance is mostly "number 11" on a hierarchy of needs.

Perhaps that last statement is an exaggeration of truth, but it is critical that the desires of investors be reconciled with the realities on the ground, that I do my job by appraising them of those realities, and that the perpetuation /preservation of wealth  is as critical as the creation of "new" money.  In addition, factors such as trustworthiness, consistency of style, and competent service are benchmarks of the client/professional relationship.

The markets and advertisers, therefore, discourage the maintenance of net worth by advancing a contagion of hazard in which powerful messages about risk-taking often supersede the notions of resilience, proven methodology, and financial stability.  Underlying those "beach house commercials' and "friendly spokesperson sit-downs" lies a subliminal messaging that Wall Street uses to its advantage to promote product offerings and fee generation.

As a whole, though, investing is a noble social endeavor illustrated by the history of how capital formation has benefitted the human condition.  So when Wall Street works against its own self-interest by muddying the waters with stories of enormous prosperity opportunities, it sometimes does so at the risk of upending consumer confidence.  Take a look at the "new high" climate which pervades the financial universe right now and ask yourself whether this is really the best time to be committing new money to the markets?  How have recent IPO's in retail, travel, and technology fared?

What is abundantly clear to this author is that greed in our society does not magically disappear and then reappear overnight, as some imprudently might have you believe.  You cannot "time" the markets in the sense of disengaging when things look bleak and reengaging when you think things look good.  The average investor has lost far too many times when applying that risk paradigm.  Corporate revenue streams that endure do so for a reason.  Their footprints extend far beyond their own boardroom.  Their names and reputations are irrefutable.  No 30-second hyperbolic commercial can compare to solid and steady....nor do any financial advisors who promote excessive or inappropriate risk-taking.

What can go wrong?

There will always be headwinds and tail winds.  If you are a golfer or sailor you already know that.  The question is how to appease one's appetite for aggressive short cycle gains in a climate fraught with a multiplicity of secular (long-term) vectors?

Living in the present, while having one eye towards the future, helps to buttress against our worst instincts to "bet it all on black"  when those choices should more pragmatically be between staying within the guard rails or overstepping the boundaries of suitability completely.  Responsible investors should know the difference between, and the consequences of, both choices.

The critical question which underpins all investing and economics is, "are we trying to create a rising number of those who obtain great wealth or are we simply trying to lower the number of those who exist at the bottom end of the pecking order?"   It really doesn't matter because it's all semantics.  The definitive problem with the capital markets, though, is the chasm that currently exists between access to money and a lack thereof by the lower castes.  There is more than enough currency to go around to solve the world's ills, but a stratified hierarchical system of allocation which amplifies the distance between the affluent and the poor harms  wealth creation and social mollification when the intent, clearly, is to do just the opposite.

Market Commentary for the week of November 4, 2019

Uncertain world

I'm hearing a lot of anecdotes, at this time of year, about how investor's psyches are upended and their confidence shot by the myriad tales and tribulations of wars in the Mid East; endless tariff negotiations; Presidential debates; immigration conflicts; global central bank pronouncements; labor strife; volatile stock markets; etc.  Many feel as if they are weighed down by an anchor, uncertain about which way to go.  It is the rare occasion when we hear about good news in corporate earnings reports.

Uncertainty is so precarious and pervasive that it's becoming tougher to make 5 year and 10 year projections.  Curiously, the spike in ambiguity crosses all demographics, all geographies, and all income levels to various degrees.  Pricing pressure and job security are the "dynamic duo" nurturing a good majority of our global insecurity.

Despite a decade of economic expansion, consumer savings and spending are still in decline, particularly discretionary spending.  Thus, a self-fulfilling spiral develops when a "wait and see" economic paradigm exists.  Believe me, the Federal Reserve lowering interest rates, yet again, last week might give the appearance of averting a recession....or runaway expansion (they're not quite clear which!)....but it reminds me of my oft-used proprietary expression, "you can lead a horse to water, but you can't make him spend"!!

It is very hard to imagine that we are in an inflation-driven marketplace.  Nevertheless, what adds to the market's hesitation is a climb in "stealth inflation" on goods and services that the public employs in every day life, including fuel; travel and leisure; food; education; and healthcare.

So, is everything wrong?  Not really.  Imperfections and trends in pricing structure are normal and usually allow for corrections, improvements and improvisation to be made concurrently.  In fact, some areas of the economy are responsibly thriving.  One only needs to look at biotech research, alternative energy developments, and technology advancements for examples of doing good for the public as well as generating profits for their shareholders.

Yes, confidence is inconclusive, but Wall Street is not the ultimate measure of how well a culture is providing for its citizens.  Spiritual capital, as well as "money", is what constitutes the wellness of an economy.  School teachers, for example, touch the next generation of innovators as deeply as...if not more so than... corporate titans.

This notion of "confidence" is one of the key data points I analyze when implementing a portfolio model, because how we "feel"  about the economy is as important as the official data generated to portray it.

Waste not

These elements I'm discussing in this missive are not specifically defined by GDP, the Federal Reserve, or financial bourses.  It is more closely related to one's attitude about life in general, fair access, and supply and demand of much needed commodities.  We are at a time in our existence when we must surely recognize that the value of our connections to others supersedes our own wants and desires.  We only have one planet and one chance to get it right.

Whereas Wall Street and traditional finance requires that one have a good working knowledge of physics, government, and economics, the human condition is governed by more ethereal, less-quantifiable, prerequisites.  Success in both endeavors, however, requires real study and real effort.

Think about it: next year begins the third decade of the current millennium.  Our choices today will reverberate for decades hence.