Market Commentary for the week of December 7, 2020

Empathy

Investing is challenging.  Finding the right securities, the perfect distribution of risks, the appropriate allocations is a knack every one of us strives for.  The landscape of information from which to choose is immense; how we interpret that data to structure a portfolio is another issue altogether.  Those decisions, while predicated upon science or methodological preferences are deeply personal.  The only thing that ultimately matters is how the measurable outcome of those decisions meaningfully impacts our portfolios, our lives, and to what degree are we satisfied afterwards.

Today, millions of people are suffering financial, economic, and social harm from the Covid virus pandemic.  While the prospects for vaccine creation and distribution are encouraging, the challenge is in the interim, waiting for that time when the disease is manageable or eradicated altogether.  In the meantime, its consequence upon business and social structure has been catastrophic.

How do we prepare clients, portfolios, and society for the immediate effects and for the future?  One way is to acknowledge that goals, like life itself, are ever-changing.  Quantitative statistics classifies things as “probabilities", never submitting definitive timelines or static points in time.  We traverse through time, we should not be counting before the game is over.  Success is simply that journey towards  something, not the ultimate, itself.  How we prepare for the voyage and what we expect from it is every bit as important, if not more so, as the integer we might ascribe to evaluate it.  Unlike darts or archery, the investment target is never sitting absolutely still, nor should it be the actual ambition.

During a crisis, in particular, it would be wise to embrace this passage and to be persistent in redefining the ultimate objective as often as necessary.

Prudent asset allocation involves assessment of the ephemeral nature of things and to invest in businesses that can sustain consumer demand and earnings acceleration over time.  Also, we seek to own businesses that are innovative, which offer new ideas and solutions for issues that affect the human condition.  Their focus is not only on today but gaining a competitive advantage tomorrow.

Market uncertainty during the past week (year) orients around business' alacrity to spend wisely, hire effectively, and to innovate quickly.  Initiatives in healthcare, energy, hunger, and community empathy are the hallmarks of successful investing, and ones which level the uneven playing field for everyone.

The world is, and has been, changing right in front of us, in part because of the pandemic, but also because of social activism and political transformation.  Just as the global economy was reaching new heights earlier this year it was ripped away from us by sickness and death.  But optimism abounds that despite life's uncertainties we can bond with the frailties and strengths that unite us all to our heroic selves, as well as recognizing the compelling investment opportunities which attach. Notable among them are health and life sciences, renewable energy, infrastructure, education, ecology, and water and food shortages.

Most importantly, each of us has to be an advocate...not just for our own self-interests, but for the needs of others.  Effective problem solving is a collaborative effort, bringing together disparate points of view to promote the common good.

Funny...but that also reads like the definition of entrepreneurship and elementary capitalism....

Market Commentary for the week of November 23, 2020

Roadmap

Crises cause uncertainty, and uncertainty translates into volatility.  At present, we are in the midst of a great deal of the former, and a mighty helping of the latter. The highs and lows of 2020 have, without a doubt, been on each end of the volatility spectrum.  Economic activity registers in bear territory, despite all the cheerleading for it to be otherwise.  Capital expenditures and budget cuts are causing us to think twice about earnings profiles of several industries going forward.  Many of the traditional correlations between consumer confidence and business profitability have been wrecked, at least in the short run.  The correction in financial asset valuations is not yet over.

The traditional cadence of the financial markets has been measurably interrupted by the lead up to the Presidential election, the aftermath of the voting (including challenges and lawsuits), and a delay by the current occupant of the White House graciously to acknowledge the final tabulation.  While we have stated before that no individual holds direct sway over the amplitude of financial cycles, we are witnessing that the malfunction of our Presidential transition traditions might possibly carry over into policymaking and a lack of cooperation later on.  The negative effect of gridlock and petulance upon executing fiscal policy will be irrefutable.

The most successful portfolios are those which focus upon economic fundamentals, preservation of capital, risk aversion, price patterns, and common sense.  Protecting oneself from the headwinds of exogenous risk influences should always be a part of the calculation.

This is proving to be a time of reversion back to the mean.   We must widen the aperture of perception from daily current events into a much wider, longer macro framework.  Prioritizing those things which lead to portfolio success...such as earnings patterns, price performance, and relative strength rankings....is an excellent place from which to start.  Those factors, alone, allow us to “block and tackle” the unknowns which predictably derail the uninitiated.  Instead of relying upon stock picking and value hunting to rebuild from the chaos, we are choosing to erect our path carefully.  It matters not the capitalization, geography, or sector...only that we comply with conventional probabilities that govern performance over time.

These data also allow us the flexibility to ignore outside “noise” from industry, political party, or individual.  We are currently finding a finite and distinctly limited number of candidates from which to choose, but we have outperformed most benchmarks in the past because we are committed only to the science of quantifying those factors enumerated above which we believe lead to a higher probability of positive outcomes.  By far, the pandemic has been the ultimate stress test upon any discipline or methodology trying to navigate through a myriad of threats.

No matter the government's ideological affiliation, we do remain bullish about market performance in the coming months. Our most pressing social and economic issues should take precedence in the new Administration, including healthcare, poverty, hunger, water, ecology, infrastructure, education, technology, and energy.   These are the issues whose solutions can bring us together irrespective of political party.  The assignation of their success is non-denominational, owing only to each of us and our desire to tackle them for the sake of our next generations and the planet itself.  These issues offer us a better understanding of where every person belongs in the dialogue, how we got here, and how to rewrite history.

Portfolio management at its core is really quite simple.  Trends become outlined, hierarchies are constructed, and securities are selected based upon how we respond to questions about our values, behaviors, our security, and our commitment to others.     

 

                                                                          Happy Thanksgiving!!

Market Commentary for the week of November 16, 2020

Impact

Extraordinary surges in equity prices following the mid-March swoon in the markets have now created uncertainty about how P/E levels and future profitability can effectively synchronize.  This has resulted in an understandable dialogue about value versus growth  equities, and whether the pandemic has forever and immeasurably influenced the direction of stocks in the short and long term.  Jobs data released last Thursday was quite poor, with many millions of persons still displaced, furloughed, or laid off altogether.  Imagine, too, the disappointment and exasperation of investors who, because interest rate levels are so low, are forced into buying stocks with good dividends as their surrogate for fixed income products.  But who is to say that that kind of "default" investing will persist, given the high levels of anxiety which infuse the situation?  All this only makes the job of portfolio management that much more complex and compelling.

There is little doubt that the viral eruption has become the single most determinative factor upon our decision making.  The disease carries on with no abrupt end in sight.  Certainly, with second and third waves spreading around the globe, it has become the vector of record upon the financial markets, institutions, families across all/any borders and political spectrums.

As a result, consumer and corporate spending and costs have become disrupted.  Earnings patterns are more disjointed, while the volume of laggard stocks continues to outpace winners.  With the exception of core industries (healthcare, technology, consumer staples) declining demand for goods is eroding profits, revenues, and hope.  Markets, needless to say, are unsure about which way to proceed.

The problem is trying to use science  as a means of quantifying levels of emotion,  such as panic and fear,  that exists...a difficult thing to attempt to do.  The virus is no one's fault; it is not a measurable variable that we have seen occurring with regularity in this century.  There is not now, nor will there be soon, a silver bullet panacea for the pandemic or for the market's unique world-weariness.  We must re-think our reactions to, behavior about, and norms concerning our way of life.  At the risk of exposing the underbelly of our vulnerabilities and weaknesses, we must avoid falling victim to myths, untruths, and hysteria. 

Our sciences exist not to placate fear but help define it......knowledge is tested in the crucible of crisis.  We should not be beholden to tips or hyperbole from our neighbors, our relatives, or friends.  Rather, we must rely upon scientific methodology and discipline to engrave our patterns of decision-making in order to create the optimal outcome for our portfolios and our lives.

Empowerment

Given all that, we remain optimistic about the tactical investment opportunities that exist...in healthcare, infrastructure, agriculture, technology, ecology, and renewable energy.....for the immediate phase as well as decades ahead.  The viral outbreak, if nothing else, allows us to reset relative strength measurements closer to their mean averages, and to reevaluate structural asset allocations that had become bloated, defective, or antiquated during the prior year.

As I noted earlier, the swift "linear contraction" in stock prices during the Spring removed a lot of investors from the competition, but also rewarded those who stayed, or those whose indecision caused them not to act, recognizing  the reality that nothing changed fundamentally about the economy  except for the ambush of a pandemic.  What happens going forward will be a peculiar blending of emotion, technical dynamics, and fundamental economic analysis.  As in any cycle, our key metrics will focus upon companies that have accelerating earnings, superior price performance, and strong relative strength integers.  From amongst that grouping will emerge sector rotation, promising trends, and a better understanding of what the landscape will look like when the Covid is fully contained.

Using this backdrop, it is appropriate to re-enter the "game”, slowly at first and mindful of any setback risks, to reposition for a broadening of opportunity and a return to normalcy in economic activity in the months ahead.

Market Commentary for the week of November 9, 2020

Postscript

The voting is over.  Let the dissension...on both sides....begin!!!  One party will be considered winners, the other, "losers".  But more importantly, the pulse beat of the globe goes on unremittingly, including commerce; infrastructure; and other necessities.....you know, like eating, drinking, and sheltering!  Basic human needs endure.

Whereas fiscal policy oftentimes reflects political biases, true agnostic economics embodies the realities of everyday life.  Everyone needs to be fed; we all aspire to be better off tomorrow; and no one is absolutely immune from infectious diseases.  These things do not respond to a date on the calendar  or a special event carved out by man.  Capital gains reveal themselves as self-evident when one takes a macro approach to markets.  In that same vein, my study of market statistics, called quantitative analysis, subscribes to the notion that relative strength integers and cyclic phases march to their own drumbeat irrespective of the calendar or the imposition of time we, as analysts, seek to impose upon them.  Quantitative study is as close to the ideal of "agnostic" economics as one can get:  just the numbers and the sciences which govern them.

Therefore, one might conclude that the election, or any other exogenous event, has minimal influence over the patterns of economics and financial markets.  While only an aspiration, the hope is that we can now get back to the study of cycles that endure, unburdened by the discourse about which party will, or will not, impose a legislative tsunami upon them.

We know this is true because we can measure (quantify) both accelerating and receding market trends.  The pandemic has laid bare economic, social, and psychological chasms that had been developing for decades prior, things like crumbling global infrastructure (roads and bridges); health and economic disadvantages amongst regions, ethnicities, and social strata; climate and ecological events, natural and man-made; dwindling resources (energy, foodstuffs, water); and other immoral/illegal doctrines of discrimination.  All these things can be quantified as to their impact upon lives, commerce, and financial markets by examining their magnitude, amplitude, and location.

Prequel

Long term active strategic asset allocation investing has been much maligned during the past 9 months.  Traders and speculators have used the pandemic crisis and an ensuing market collapse as justification for "picking up" undervalued or distressed stocks.  "If it's cheap today, we might as well jump in with both feet",  they explain.  And while we see the reasoning behind that, or any other, investment discipline, we are also grateful to our clients who appreciate us for our steady navigation provided to their portfolios by not  increasing the drama (and volatility) of their hard-earned wealth.

Our data underscores how those industries with sustainable earnings power will, and have been, endure no matter who the victor last Tuesday night.  We acknowledge that there might be an overall near-term disparity in portfolio performance between value versus growth  equities, but the 5, 10, and 20 year track record of earnings acceleration patterns, price performance, and sector relative strength asset allocation investing trumps them all.

Despite all that, we can presume that a highly charged political atmosphere will wield various influences over the near-term outcome upon the markets.  However, as alluded to earlier, no matter who the winner...and loser...the things that matter most to cyclic phase investing have more to do with that which binds us than that which identifies with any ideology or political party.  Yes, the legislative power is held by those in power, but the mandate for change throughout history owes to entrepreneurship and innovation that springs from the talented minds of those who seek the solutions to the problems of man.

Economic growth always produces capital gains.  Growth is the darling of the already-rich, as well as the aspirations of the seekers of fortune.  When people feel "safe" they consume.  Those cash flows become a self-perpetuating royalty to businesses and households, alike.  To a market such as the one we have now, that kind of optimism would be welcome, indeed.  Everything now depends upon the stability, not fragility, of our ethical message.

Market Commentary for the week of November 2, 2020

Square one

Benchmark indices tumbled last week ahead of tomorrow's Presidential election, and owing mostly to disappointments over government inaction towards the pandemic and bailout spending packages,  as well as incoherent data about the economy.  Reports about expanding US gross domestic product (GDP) have to be offset, of course, by the fact that the third quarter was starting off from such a low number, having fallen precipitously in the first two quarters of this year from virus related fears.  Think of it this way....if you were a restaurant with no customers, an increase of 15 people each night would represent an "improvement".  But not one which might sustain profits, employees wages, or long-term viability.  Despite a strong bias always to find reasons to buy stocks, investors are sending a clear signal that nothing is certain in the age of Covid 19.

Any expectation that the government will immediately ride to the rescue to help stem the tide of business closures and millions of jobs lost is just a worn out fiction.  The work of sorting out winners and losers unfortunately falls upon the private sector and the rest of us to figure out, with the hope that we can circumvent an uglier political, economic, and health-related outcome than what we have now.

Most dire of all, though, is that as the chasms are widening, there are many who are doing  better than "just good enough" to stay solvent.  The profit disparity between large businesses and Main Street stores is staggeringly large, which causes all sorts of problems for Wall Street prognosticators when trying to hone in on effective recommendations for clients and near-term portfolio strategies.  Thus, a pattern of hope followed by panic, then hope again is causing...or being caused by.....worries about the virus' containment.

We witnessed last week, as before, an inter-day pattern in the stock averages that bounces wildly from triple digit gains on the Dow Jones to triple digit losses the very next.  Many investors are feeling whip sawed into a state of submission, and don't know which way to go or to whom to turn.

Move on

Long term sustainability will only return when the virus is defeated.  Until then, it is likely that we see market spurts and stops corresponding to psychological and economic patterns of capital investments and consumer spending.  Instead of thinking about the 24 hour news cycle, we should retrain our economic brains to think in terms of 5 and 10 year cycles.  Our fixation upon headlines is detrimental to corporate profits and psychological well-being.  Successful bull markets have never been predicated upon short-cycle response but, rather, upon macro continuums and innovation made over the long haul.

I have always found a strong correlation between capital gains  and socially responsible investing.  One of our primary themes for the next decade will be to focus upon capital spending in areas of the planet's sustainability....telling a tale of economic and social equality for all living things on this sphere.  In particular, our  ArlingtonEconometrics probability measures revolve around  enterprises with outsized earnings growth well above historical averages, profitability and productivity in renewable energy, life sciences, agriculture (food and water), technology, ecology, and infrastructure.

Investor's problems exist when they "look backwards" rather than "looking forwards".  Those who worry that "it wasn't done this way before" are being held hostage by old ideas.  Mankind has always looked ahead to adapt to change.  Communications, air flight, medicine, science are all different than a century ago.  Intercontinental travel is different today than in the age of Magellan, yes?  The profound impact of innovation and entrepreneurship can change industries, borders, and perspectives for decades.

The herd culture must be broken.  We must embrace a willingness to accept change, boldness, new deeds, policies.  Monetary and fiscal incentives can only do so much to create the conditions favorable to growth.  We, ourselves, must do the rest.

Market Commentary for the week of October 19, 2020

Cratering

The markets reacted predictably, and violently, last week to a slew of economic data, including a continuing expansion in the unemployment figures.  Tens of thousands of workers are being laid off or furloughed, millions more are permanently out of work.  Clearly, the global recovery is stagnating and the reason is an inability to control hotspots and outbreaks of the Corona virus.  But the issues that govern market responses are larger and more pronounced than the immediacy of weekly data.  Long before we arrived "here" there were underpinnings indicating  that confidence was waning and valuations were bloated.

More succinctly, history creates seminal periods and moments in which the impact of current events becomes indelibly etched upon our brain.  Everyone remembers where they were when the Twin Towers fell on 9/11; what they were doing when President Kennedy was assassinated; the horror of the fateful attack on Pearl Harbor.  Similarly, no one will forget the psychological, medical, and economic impact of the past  8 month's "once in a lifetime" global pandemic.

Without exaggeration, the current effects of our economic and political situation have altered behavior and perceptions inexorably.

The loss of norms and structure affects the sustainability of economic priorities, many of which were the foundation of confidence and direction within global markets for generations.  Not only is the current decline in valuations a shock to our system, it is a manifestation of underlying inequities that defined corporations, government, and social institutions during our lifetimes.  When those values are shaken, behaviors and beliefs are robbed of their legitimacy.

And yet, while those "norms" are being questioned, our quantitative data analysis also sees an historic economic and social opportunity to hit the reset button, to innovate structure and custom, to reshape capital gains opportunities for decades ahead.

It is true that we are currently in the throes of a short cycle capitulation.  Despite the value "hawks" who swoop in to buy almost any security in distress, there is noticeable deterioration in relative strength integers throughout the sector landscape.  This is because of intense levels of anxiety about corporate profitability and consumer spending.  I won't say the breach is "unprecedented", but we must go back to last century's Great Depression to find comparables.

Recovery

The interruption of capital flow and consumer confidence explains only that  a recession occurs, not why.   We observe that even as fiscal stimulus and monetary policy is directed at the public, until the pandemic/disease is contained or eradicated altogether there is a high probability that uncertainty will persist.  More disturbing, though, is that the gaps between those directly affected by economic dislocation and those who are not is widening.  The percentage of the population teetering towards poverty is expanding while the wealthy have "benefitted" mightily from the Summer's stock market rebound.  In addition, brand name companies are closing stores, going into bankruptcy, or laying off employees in record numbers.  The economy appears to be in a tenuous position.

Further, the lack of correlation between the virus and "wealth" is the great equalizer.  Deadly diseases are nondenominational, regionally agnostic, and politically neutral.  No matter one's financial station, they are not immune from sickness or death.  I wrote about the definition of wealth  in this month's Quarterly commentary....how the accumulation of financial assets does not necessarily, or sufficiently,  define a household or corporation's health or well-being.  But, clearly, as the disparity between those who have "money" and those without grows globally, the future ramifications will exacerbate a dilemma and must be considered as economic and social obstacles.

Traditional avenues of wealth-creation are being eviscerated and exposed as unfair by the virus crisis.  Now is the time to think about innovation, social inclusiveness, economic revitalization, and political reason.  The poor, the hungry, the socially disenfranchised and, yes, the wealthy will depend on these new "laws" of commerce.   

Market Commentary for the week of October 1, 2020

Wealth

 

 

There is no doubt in anyone's mind that we are fast approaching the end of one of the most tumultuous years in our lifetime, one which assailed us with financial, emotional, and health/medical disruptions as never before.  Making and sustaining wealth in that environment has been difficult, at best.  But building portfolios and capital gains requires forethought, goal planning, and restraint.  Those attributes will be required going forward.

 

One must also be mentally prepared to deal with failure and unpredictability.

 

“Hoping for success but planning for failure”  is not just a slogan but a necessity for coming out the other end of these major disorders.  Investment success is never a given; imbalances and obstacles are a part of life.  Understanding the ebb and flow of one's undertaking is the essence of knowing how to compete in the financial markets.  Successful portfolio modeling is predicated upon cycles, relative strength fluctuations, profits and losses, and an adherence to a consistent method.  If you can do those things then most of the heavy lifting will have already been done prior to  any roadblocks and capitulations that are certain to occur.  

 

What matters most is that your net worth be adequately buttressed to mitigate against the subjective intangibles that can mess with your mind.  Your net worth, after all, is not just an empirical integer of items accumulated, but also the attitudes and feelings you ascribe to that number.  Enjoying your life and your assets is as important to your financial well-being as the process of acquiring it.

 

Markets

 

In the aggregate, the most successful sectors this year have been healthcare/biopharmaceuticals, information technology, consumer staples (including food and water), and basic materials.  They each have demonstrated an earnings staying power derived from an "everyday"

application of functions, as well as strong quantitative measures that are contra-indicative of the volatility found in other businesses.  We believe those sectors have a likely probability of maintaining their relative strength advantage.

 

The markets are reverting back to a prerequisite for earnings growth. Unlike previous periods of wild speculation, investors are looking for that which can sustain portfolios while reducing the effects of short term volatility.

 

However, the palette of potential purchase candidates for this quarter is about as shallow as we have seen in years.  Markets have run so far, so fast, that investors are now searching for quality and "comfort" to pacify the consequence of mental whiplash.  They are prioritizing preservation of capital, global security, social issues, and political empathy.  Believe me, there is no dearth of fabulous capital gains potential in a novel context for the future: biotech, ecology, infrastructure, technology, education, agriculture, poverty, housing, hunger.   There is no end to global cyclical growth opportunities if we adopt an innovative paradigm of analysis that makes this" lost year" not a lost year at all.

 

When investors emerge from their financial and psychological cocoon those things that improve their generational prospects can also increase their confidence, spending power, and emotional recovery.  Major secular bull markets of the past have always required public "buy-in" towards fiscal and monetary measures.  The Federal Reserve and other global central banks have imposed a steady measure of low interest rates, unfortunately without commensurate spending and growth.  Deep-rooted economic expansion has thus far been a myth only in the minds of those who are trying to create it.

 

By this time one would have expected broad capital expenditures and social projects designed to ameliorate our deteriorating social condition.  Previous bull markets have always had sustained periods of industrial and consumer spending that led to good jobs, good pay, comfortable lifestyles, and expanding corporate profits.  This instance may not, however, be the halcyon days of years gone by.  As I have said many times before…“you can lead a horse to water, but you can't make him spend!!”   For the most part today's corporate profits derive from cost-cutting, share buybacks, and explosive stock valuations on the exchanges.  Robust capital spending must occur for the next up leg in the financial markets to gain permanent traction.

 

 

Strategy

 

The pandemic has laid bare many of the policy inequities of the past that left scars upon the global economy.  Too many are dead, despondent, dislocated, or desperate.  This situation cannot persist.  People must be enticed back to social and economic engagement by politicians, economists, business leaders, media, and spiritual institutions.  Otherwise, the precarious nature of things will spiral deeper into a serious psychological, medical, and financial abyss.  It is our hope, and belief, that the cyclical nature of things will ultimately create a favorable rebound in all those endeavors.

 

Good environmental, social, and political governance falls under the parlance of what many call “socially responsible investing”  (SRI).   Using these benchmarks as principles of investment analysis is a way to build capital gains responsibly, with a purpose.  SRI also makes a meaningful impact upon everyday life, as well as securing regions, nations, and continents from harm.  As the world changes in these unprecedented times we might only imagine how a pioneering perspective could yield bountiful capital gains for financial clients.  It is all a matter of knowing where, and how, to look for solutions as yet unimagined.

 

SRI also creates lower beta (volatility) in portfolios while offering a myriad number of sectors from which to choose.

 

 

Conclusion

 

None of this conversation is relevant, of course, unless we also undertake to redefine the meaning and purpose of wealth.

 

Wealth allows us to enjoy the moment, rather than opining about what we wish  we had.  Wealth relieves us from the myth that the “other guy” has more of what we want.  Appreciation of our wealth makes it much easier to pursue the things that are really important to living a good life.

 

What, then, is wealth?

 

That question has innumerable subjective and objective responses.  Is it, as I said earlier, an integer?   Is wealth, by itself, a sense of accomplishment, of achievement?  Does wealth define the pace at which we live our daily lives?  Is it good health, friendships, family relationships?  I suppose the answer to those and other questions is determined by whether you believe you actually are  wealthy.  This is one of life's circular conundrums...which comes first, the chicken or the egg?

 

What one cannot afford however, rich or poor, is a lack of empathy for anyone else.  Then, I'm afraid, you don't possess the necessaries to appreciate good fortune even if it is staring right back at you.  

 

 

 

 

 

 

 

Suggested balanced account asset allocation, Q4, 2020

Equity:                 35%

Fixed Income:   35%

Cash:                   30%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market Commentary for the week of Sepember 21, 2020

Just as expected

Market volatility carried on last week just as expected, given that 2020 has already been a highly charged year.  Investors have had to navigate a health pandemic, economic disruptions, an inversion of social norms, and an unusual intractability in political discourse.  How else would you expect markets to react considering the uncertainty of business profitability?

It becomes increasingly more important for portfolios accurately to reflect the “real” risk tolerances, not just the bravado one feels when things are going their way.

I infer that more of the same unpredictability lies ahead, but with a resolution looming on the horizon.  How this phase ends, of course, is entirely unknown, but the preponderance of evidence suggests that the situation is not as rosy under the surface as that which shines brightly in the news spotlights.  Unemployment remains a thorny issue as the undeniable wealth gap continues to widen.  A crossroads lies ahead for politicians and households.  Profit taking in the markets two weeks ago nearly brought a halt to the bull recovery bubble.  Like all exuberances, they must come to an end at some point.  The seduction of stocks since the April lows is undeniable, but not a sufficient strategy to build long term sustainability.  Practically speaking, prudent wealth management focuses as much upon mitigating downside risk as it does striving to generate valuation upside and capital gains.

Dissonant events are sometimes conflated into meaningless correlations.  The expansion and exaggerations of relative strength integers in the market inflates both valuations and expectations unreasonably.  There is a larger percentage of stocks and financial assets trading at bloated multiples today such that evaluations and predictions are harder to make based upon historical precedent.

Becoming addicted to stock rallies and hyperbole is dangerous.  The Federal Reserve is stoking the fire with its “low and slow” proclamations last week, continuing a dose of low interest rates over a protracted period of time.  The “feel good” effect of low interest rates is a quick elixir for systemic economic disequilibrium that needs to be addressed in the long run.  Unless the global economy can sustain growth while also allowing rates and inflation to budge upwards there will always be an artificiality to the numbers.  Only Repunzel could spin gold out of straw.

Certainly no one wants to relive the bubbles of 1999 or 2008 over again.  Once is enough, thank you.  Therefore, it would be nice to see politicians gain some empathy towards their less fortunate constituents by quickly addressing the hunger crisis, the environmental crisis, the social unrest, and the leadership void they (the politicians) are intentionally creating.  None of this is the job of central banks or financial interventionists.  It requires political courage and fiscal measures.

Profound lessons

With the challenges we all face from the pandemic, social injustice, and economic dislocation it is no wonder that there is insecurity.  At the intersection of fear and stress lies a landscape with which many of us are unfamiliar and uncomfortable.  Indeed, even the use of "scientific method" pales in comparison to common sense about what we instinctively “know” and what we “believe”.

Because there are no “correct” answers to the dilemma of what lies ahead the best we can do is to map out our long term goals, stop listening to outside noise and 24 hour media toxicity, and do what each of us feels is right for our own situation.  After all, synthesizing those elements is what constitutes financial markets....and life itself.  Battling the exigencies and uncertainty of what comes next is the essence of creating opportunity in the future.

 

 

               (our next correspondence will be the Quarterly Commentary, October 1, 2020)      

Market Commentary for the week of August 31, 2020

Fool me once.... To say that stock valuations are a little ahead of themselves would be an understatement. As the averages hover around and break into new high territory one would think that we've already time-travelled into 2021, solved the pandemic crisis, and fixed most of our climate and energy problems. But the truth is that we have evolved into a marketplace of bottom lines and expectations that are several standard deviations from the reality on the ground. If you are a corporate CEO your obligations first and foremost are to produce profits for your stakeholders. Strange as it might seem in this age of global disease, unemployment, business closures, and consumer uncertainty, there are industries that are reporting record levels of profits, and with such speed that Wall Street investors are constantly playing catch-up with those share prices. However, there is also a massive disengagement between transactions in the market and the employees and citizens who populate our workplaces.....millions unemployed; millions more afflicted with a deadly virus; hundreds of thousands dead; thousands experiencing healthcare bankruptcies; multiple industries, including airlines, restaurants, transit, and the arts irrevocably financially disaffected. At 9:30 am each weekday morning, when the exchanges open, the perception and reality gaps widen more broadly than ever before. So why is the disconnect so pervasive and distinct? Because the objectives of the players on each side of the game are so diametrically in opposition to each other that the tug of war is only won at the closing bell, and by which side nobody can straightforwardly decipher. As noted above, CEO's are mandated to generate capital gains for their shareholders. It is their mission and the reason for holding the job. However, in this world of technology, artificial intelligence, and rapid innovation those industries require fewer "real people" to get the job done. Fewer capital expenditures (such as salaries and benefits) inure to the bottom line, thus setting up a perverse game in which a bull market closing price is a far better indicator of success than calculating the number of children who go hungry each night. Capitalism is good. Egalitarian capitalism would be better. It is so...or at least it seems...that things are not getting better for a large percentage of those not considered “affluent”. And yet, the affluent drive the same roads with potholes, cross the same crumbling bridges, take the same medicines, attend the same churches, eat the same foods, breathe the same (polluted) air, drink the same water. We had so many things in common before the corona virus pandemic that any excuses for not eradicating hunger, poverty, cruelty, and apathy just don't carry weight anymore. Curiously, the same kind of capital gains expectations that speculators and traders salivate over today would be available in industries and solutions to the human condition. Opportunities in the “next big thing” are right under our nose. ....fool me twice Somewhere between rational egalitarian capitalism and irrational rolling of the dice gambling lies a happy medium in which the world's priorities wouldn't seem so out of whack, particularly during these trying times. Hey, a dollar earned is a dollar earned, correct? So why not invest in putting people back to work by cleaning our air and water; feeding the hungry; paving the roads; curing disease; invigorating the social discourse; educating the rural and urban children; eradicating poverty and ghettos of the disenfranchised? Everyone has the potential to rise up and succeed, and we must acknowledge that their perceptions and feelings are as valuable as any currency. The world is moving ever faster; too fast for some. The wealthy should be grateful for their largesse but cognizant of those less fortunate. That is why those CEO's entrusted with the welfare of their companies should also be stewards of their communities, creatively plowing profits back into their first assets.....the employees who take the elevators up and down each day. Despite the psychological ebullience we feel watching today's S&P valuations reveal to us what a post-pandemic 2021 might look like, there is still reticence to declare the virus over and done with. Airlines are flying at 20 percent capacity; restaurants are below 25 percent full; office space is 30 percent unoccupied. No amount of cajoling or convincing can get a horse to drink at a trough if he isn't so inclined.

Market Commentary for the week of Monday, August 17, 2020

Numbers, smoke, and mirrors No doubt that we are in the middle of a fantastic bull market-style recovery as evidenced by last week's continuation of price surges in equities. But historically the most potent bull markets have been underpinned not by fantastical price spikes alone, but also by significant participation and overwhelming consumer optimism, neither of which unfortunately abounds today because of concerns about health and politics. It seems that the unsavory memories of the last two great recessions have taken much of the enthusiasm out of the current bull rally. So much so that the decline in households that actually participate in financial investing has collapsed to its lowest point in generations. Without jobs, without income, without health safety protocols a large majority those who previously identified themselves as actively sophisticated investors have abandoned the exercise altogether. Yesterday's long term objectives have morphed into today's day-to-day survival. However, the dissipation in participation has not crippled the markets. To the contrary, bourses have become the playground for professional traders, hopeful gamblers whose goal is to "shoot the moon", electronic trading platforms owned by major financial institutions, and the one-off "newbie's" who simply feel that they missed the train and need now to jump on board. While all this is happening the financial services firms are blanketing the airwaves with "trust me, believe me" commercials and solicitations for your currency. After all, making money in the market is as easy as baking a pie, isn't it? They rapture you with sunset walks on the beach, family dinner gatherings, ocean journeys, and direct face-on pitches telling you that their fiduciary services are better than the next guy. But just like the airlines, cruise companies, casinos, restaurants, and hotels they are hungry for you to come back and spend with them. What they, and others, must realize is that we have mostly a crisis on Main Street, not Wall Street. The previously mentioned volatility, while providing opportunity for some, is actually the perfect villain to the average citizen. Confusion, fear, and uncertainty are horrible elements for smooth investing. So, when a Regional Vice President looks at you through the camera lens, consider whose objectives first he/she is trying to fulfill. Sour grapes by me because these firms have garnered the spotlight? Hardly. It's more a matter of looking out for your best interests when the siren call of seduction comes your way. Dig in We do have control of our investment outcomes using prudent processes of asset allocation and risk mitigation. The proliferation of options is vast, in fact. But our love affair with making money must also be tempered by a healthy respect for fear of losing it, too. No doubt the dot.com crash in the 90's, the housing/fiscal crisis of 2008, and today's pandemic outbreak have left a bitter taste in our mouths, particularly those scarred and sullied by capital losses that changed the trajectory of their goals and aspirations. It takes discipline not to be tempted by hyperbole and greed. It is obvious to me that the markets are a soulful, dangerous place for the uninitiated. Not that we, too, aren't participating. In fact, valuation expansion since the mini-crash in March has been a boon to our performance. But it has become a race to chase what was once yesterday's opportunity...and that kind of chase never ends well. There will always be a top. That is the nature of cyclical phase methodology. One can never fill a vessel fuller than "full". The brand name stocks have already run, the laggards continue to lag. Whereas there is no indication yet that the markets are meeting resistance or are doomed to fail, there should always be that element of caution, that voice in your head gleaned from past experience, that cannot be coerced by any "Honest Abe" television commercial.

Market Commentary for the week of August 3, 2020

Century

In the wake of last week's cache of economic announcements (historically unprecedented contractions in GDP, employment, Fed stimulus) we have an immense challenge to realign our perspective about that which ultimately makes for good investment outcomes.  The Covid virus respects no borders or ideology so our solutions, similarly, must be borderless, aggressive, and comprehensive.  Yes, we need immediate responses to these crises, but we also need thoughtful, fact based, strategic forecasting.

The world is moving at such an accelerated pace, it seems, that “yesterday's news” often becomes obsolete by sunrise this morning.  But consider that prudent investing takes into account cycles which traverse longer than just 24 hours.  For example, name any business that functions purely on a “24 hour business plan”.  While custom dictates that performance be reported every quarter (3 months), even that schedule is too compact.  What would happen if we elongate the performance metric to “every 100 years”?   Things were completely different a century ago, and will be a century hence.

Look around.  One hundred years ago there were fewer automobiles and airplanes; the palette of life saving pharmaceuticals available was slight; we used Morse code, telegraph, and regular mail to communicate; women had no vote; there was no television; agriculture was a generational, family owned endeavor; education was strictly a brick and mortar experience; the world was at war; there was a global pandemic.

With the exception of war and pandemic, most everything is different today, and will be different 100 years from now.

It's no mystery that if we were to build an investment portfolio that plans thoughtfully for the future rather than just maintaining the status quo we should reasonably expect profitability and growth.

To be precise, there is no doubt that cycles come in all durations…long, short, intermediate…just as investors come in many iterations.  Losing the leverage that day-trading accords is not a consideration for many of you.  Instant gratification and message processing is the future.

But just for purposes of illustration, let's accept that the compression of our attention span and the overstimulation of our information receptors has also made for a wildly turbulent marketplace, not to mention inordinate consternation, tension, and panic .  After all, that which distinguishes us as adults from children is our ability to lend perspective, insight, and rationality to things which otherwise might provoke emotional, irrational outbursts.

Look, I'm no novice to the investment game.  But the difference between casino gambling and investing is perspective, methodology, and time.  Many of the things we think we desire from Wall Street are actually induced by peer pressure, hyperbole, and well-produced television commercials.  Investing is a noble obsession, if done with social consciousness and shared responsibility.

In 100 years we could

.....clean our air and oceans

.....eliminate hunger and poverty

.....travel extra terrestrially

.....raise children to be loving and color blind

.....eradicate cancer and other deadly diseases.

Most of these things are "investable assets" we should be planning for and implementing in our lives today, Monday, August 3, 2020.

Market Commentary for the week of July 27, 2020

Calm(er) waters

Markets took a pause last week from intense volatility and speculation...which was a good thing.  Like eating a gourmet meal, it is always smart to pause in between courses.

However the calm didn't change the fact that there is now, and will be down the line, a major reevaluation taking place in boardrooms, parliaments, and households regarding future expenditures and potential income.

Still struggling to gain capacity, the hospitality, travel and leisure, airline, and restaurant businesses are fighting for survival, while the stay-at-home industries (furniture, television, computer hardware, remodeling) are vastly improving.

All this means that the world has been forced to shift priorities because of the Covid virus and maybe, despite the drastic toll in lives and commerce, there can be a silver lining after all.  A preoccupation with "things" and tangible displays of accumulation had come to signify our daily existence.  Today, we are witnessing a revival of values-related investing and lifestyles.

The financial markets are rebounding in other ways as well.  The "trader's mindset", value driven activity following the market's crash in March, is now morphing into a growth and profit mindset.  The promise of continued low interest rates raises the hope that money can be invested towards infrastructure, healthcare, education, and energy.  I continue to root this market forward, believing that the underlying economic fundamentals that were strong enough to propel the economy 6 months ago can serve as the basis for the next leg upwards.

Still, the virus is not defeated nor really in a pause.  It is everywhere and quite lethal.  Pockets of outbreak here in the US and elsewhere around the world are caused, in part, by the ubiquitous nature of viruses, but also by a sense of complacency and boredom  by those who just wish this was all over...now!!  Until there are genuine palliative care and vaccine alternatives, the likelihood of uncertain and sloppy financial markets is still probable.

Government efforts to stimulate economic activity pales in comparison to any pronouncements from the scientific and medical community.  Thus, expectations for a straight-line, "rocket ship" type recovery, economically or medically, are misplaced until or unless those words of victory occur.  The next quarter, perhaps the next 6 months, will mostly be determined by advances in medical science.

Despite our rapt interest in what the CEO's might have to say, the real voices of motivation are the pharmacists, educators, doctors, and ethicists who are working tirelessly on our behalf.

Market Commentary for the week of July 13, 2020

Words matter

As the third quarter unfolds, we are gaining more clarity about what lies ahead for the financial/investment markets.  Without question, there will continue to be an abundance of "headline news"  that shapes the landscape versus a kind of "big picture" scenario.  We are six months into a global economic crisis that has sown discord and disruption.  Despite that uncertainty, we feel comfortable with our macro, top-down identifications, beginning with extremely accommodative monetary policy and a belief that underlying fundamentals...although a bit muddied at present...can rebuild.  Spending and demand will remain muted, but we see no indication of throwing in the towel just yet.

We know which sectors will thrive (pharmaceuticals, technology) and which will fight hard for survival (cyclicals, industrials).  The market is endeavoring to push through its volatility and generate profits for investors.  We caution, however, that indiscriminately chasing after expanding P/E ratios and oversized relative strength integers could lead to trouble.  Remember, all things are cyclical.  Thus, price peaks are likely to pull back at some point, particularly if earnings fall short of expectations.  Being macro-oriented might also help to eliminate some costly mistakes.  While the economy and the financial markets sometimes emulate each other, this is one instance in which the dichotomy must be understood.  The economic recovery dating back to the 2008 recession, for example, is still trying to gain traction globally but, obviously, current events surrounding the pandemic might hold greater influence in the short-term.

From a strictly empirical point of view, we have no problem acknowledging that the averages stand today about where they did at the beginning of the year, and have recovered extraordinarily well from their lows in February/March.  Lows so low and the recovery so good, in fact, that history records the last three months as the "best"  quarter in decades.

It might be time to refine the language we use when referring to current events......

Indeed, the markets soared over 20% last quarter owing in part to federal stimulus, low interest rates, viral controls, hopes for the future, and an indomitable spirit of "value speculation". (It is easy to multiply gains when bouncing from the basement of valuations.)  But is the word "best" an effective way to describe where we are now and from where we came?  Without parsing definitions, words, and perceptions, matter.

Ask any family touched by the death of a loved one, with depleted savings, inconvenienced by stay-at-home quarantine, or unemployed/laid off/furloughed if the last three months were their  “best”.  While the world was being threatened by a deadly pandemic, inexorable changes were occurring in attitudes, spending, lifestyles, and behavior.  We find ourselves today at the intersection of politics, money, and morality.

Similarly, we hear people asking to "go back"  to normalcy, send our children back  to school, bring the economy back.  Perhaps going backwards is not possible anymore.  A new normal is necessary and we need to get used to that.  Once again, ask anyone who is not an equity shareholder....and there are many....if the last three months were their best and you would probably get a different answer than the one Wall Street analysts are using.

It is time to find a fresh balance.....in investing and elsewhere....that creates an equilibrium in healthcare, social rights, politics, education, etc. so that everyone can benefit from their initiative and inspiration.  Wall Street and Main Street are just not that dissimilar, one hopes.

I think that when we call last quarter's market performance the “best", and limit the scope of our language and evaluation solely to the percentage return on the Dow Jones, that we need to step back and re-think how capitalism and vernacular all play a part in limiting or advancing the opportunity for the population as a whole.  In my mind Wall Street is not about a moment in time....the closing price on the S&P or a quarterly earnings report, for example.  Rather, it represents a marketplace in which capital is unleashed for the long term to identify problems and provide solutions for the betterment of society.

Consider a basket of needs today: poverty, hunger, pollution, water shortage, energy, transportation, infrastructure, education, healthcare.

The third quarter, alone, provides a panoply of buying opportunities for those so inclined.