A Body at Rest
While
arguably looking ahead to next November's US Presidential election, the balance
of investor's focus is upon how they can persist in generating the kind of
gains they had during 2019 and maximizing whatever steam still might exist in
the rally during the coming quarter(s).
Whether
through quantitative sciences or merely good old fashioned intuition, they know
that the risk of economic headwinds is intensifying. Their instincts are to bet on the rally
failing at some point, even modestly, rather than gaining additional traction
forward.
One
of the keenest attributes a money manager can posses is the ability to live in
the present moment while, at the same, heeding the examples and lessons of past
history. That past presently includes an
environment fostered by fiscal and monetary policy of extraordinarily low
interest rates, tax incentives for the wealthy, and economic spending limits
without restrictions. To that end one
has to wonder whether it is appropriate, and sustainable, to synthesize the
kind of financial landscape in which one asset class is favored over another in
juxtaposition to a free market determining such outcome?
When
monetary policy acts as a de facto portfolio management process it results in
highly skewed and unrealistic results.
Nevertheless,
there is no denying the success of the financial markets last year. Ten years after the Great Recession the
economy and the financial markets are recovering quite agreeably.
There
is, however, a broad range of opinion about whether the recovery is too old, or
just about right. As observed above, I
believe part of the expansion is directly attributable to quantitative easing
(low interest rates) and, thus manufactured policies that unleash capital into
the marketplace without moral forethought or prudent regulation. Because of a lack of coherence in social
discourse the markets last year were subject to enormous swings based upon
breakdowns in consumer and corporate confidence. Tariffs/no tariffs. Rate hikes/no rate hikes. Stock market booms/stock market busts. Without clarity and strong moral direction,
the staying power of the recovery is at risk.
Markets
When
asking if the economy is "just right" I would direct your attention
to the astonishing polarity in levels of achievement for all social classes. Rates of global poverty, hunger, and
displacement are growing inversely disproportionate to the percentage integers
by which you and your money manager are measuring your portfolio
performance. Even as you aggregate your
net gains and losses for the year, millions of people are going to bed hungry,
impoverished, or homeless.
The
situation is not all doom and gloom, however. despite my misgivings. The economy is improving and we laud
those in the public and private realm whose focus is upon maximizing consumer
spending and corporate capital expenditures in order to navigate that
improvement across a spectrum of social strata.
For example , no matter who wins the presidential sweepstakes in
November, there are many who are searching for a more organic reason to
cultivate earnings growth across multiple sectors and for significant duration.
One
might actually make the case that current valuations in specific sectors
(healthcare, biotech, infrastructure) are actually a little on the low side of
their ultimate potential. Knowing that
there is always a reason/season to be fully invested, and despite the short
term risks of political and global disproportion, the catalysts for business
growth and innovation are all around us.
In
fact, owing to the biases of central bankers to keep interest rates low for the
foreseeable future, our portfolio construction might be a little more
aggressive in the early part of the year to take advantage of the earnings
potential those initiatives characterize. The overall trajectory of the
financial markets continues to be upwards, and we have no argument if that
continues to be the case.
One
of the most compelling industrial shifts we are witnessing is the transition
from fossil fuels to alternative and sustainable sources of energy. The enormous costs of this transfer are still
quite prohibitive, but is in these efforts that we see a harmonious blending of
socially responsible thought with capital and profit formation. Despite the lengthy timeline for complete
transformation of employment and hardware in this realm, we commend any effort
to put heart and money into the enterprise.
Not
to be overlooked, the same kind of profit projection exists in medical sciences
and biopharmaceutical research. Those
diligent scientists who accept this burden are the vanguard of moral, capital,
and public policies that bring results for decades.
Consider,
if you will, a portfolio for the next decade consisting of environmental,
agricultural, technological, energy related, healthcare, education, and
infrastructure companies. The next
century is ripe with potential in these and other sectors where everyone can
benefit and all portfolios can be "winners".
Conclusion
We
are classical "Point A to Point B" type investors. We are at a stage in the world's political
and economic development where choices need to be made.....proper choices. My proprietary quantitative tools tell me
that there is reason for optimism, even in the face of a long odds. An index-tracking
approach or an indiscriminate "all -in" portfolio philosophy is simply too dangerous
and inconsistent to generate the kind of targeted gains one would expect when
marrying aggressive growth with a need to protect capital from erosion. You
have to have a better plan.
Too
often, exogenous current events can foil even the best of plans. Thus, one needs to be aware of the
possibility of headwinds and hurricanes.
Panic is not an option....planning and methodology are. We note that the last decade had its failures
and naysayers, too. The only constant in the global marketplace is change. Shifts in demographics, climate, politics,
and moral predispositions marks the history of mankind. Each time there is scientific or geopolitical
innovation there is new evolution and meaning to our old clichés and norms.
One
of the primary reasons for market volatility today is that too many believe
that the market isn't really working for them.
I wrote above that the disparity between rich and poor is at its widest
in decades, even as analysts talk about how fulfilling the marketplace is and
has become. Still today, at the
recovery's apex, only a small percentage of fortunate investors owns a majority
of the globe's wealth. An economic reckoning
is in the offing unless these gaps are diminished. As smaller investors struggle to keep pace,
larger fortunes are growing exponentially.
There
continues to be a bigger psychological, as well as remunerative, cavern to
fill. While the stock market averages
are pushing up prosperity for all investors, the actual "median"
wealth figure is highly skewed by the affluent
earning more. Mistaking the stock indices
annual average gains as equivalencies to those extra protections required by
good governance for the rest of the population is a disingenuous notion.
The
turn of the decade is yet another opportunity to reassess our imperative to
help everyone get ahead while the markets are still offering, The drumbeat of glamorous investment
opportunities makes it seem as if everyone is making a fortune, these
days. And if you're not invested, then “why not?" and "let's
get started" right now. But still, drill down a little further and
you will find that many can neither embrace nor afford those conclusions. The disconnect is actually where opportunity
lies to comb through bones and make sound moral and economic judgments.
For
those who care about what's inside the shiny wrapping paper...rather than the paper
itself....the year ahead is one of great anticipation.
Suggested
balanced account asset allocation, Q1, 2020
Equity: 54%
Fixed
Income: 41%
Cash: 5%
