Permission
granted
The new year began with
an unwavering opinion by most observers and analysts that the global recession
is defeated and that the overall economy is strong, barring any unforeseen or
exogenous outside influences which might inhibit its health and expansion.
Well.....welcome to the
real world of unexpected twists, turns, and
personality defects.
With not yet one full
week expired, the world's focus shifted violently from politics in Washington
DC to conflicts in the Middle East, and back again. In its wake, oil prices, industrial capacity,
consumer demand, and market earnings all came under greater scrutiny.
Are we at crisis levels
yet? No.
But an otherwise clear sky turned awfully foreboding in a hurry. There are takeaways we can draw upon very
early in 2020 that might restore sanity and fiduciary responsibility and keep
the whole thing from tumbling into yet another abyss....
Primarily, I urge
clients to heed my oft-told admonition that the
stock markets and the global economy are not necessarily one in the same. Despite their apparent lock-step (correlated)
relationship, they are two distinctly different entities. In past missives I have referred to their
symbiotic chart patterns as a parallel
disconnect, attempting to draw your
attention to two roads, seemingly intersecting, but which differ markedly in
their organic construct. These two
phenomena do, indeed, embody quite separate data points and identities, despite
the fact that when traversing similar arcs they look as if they are twins.
The reason why I view this
as a governing principle of 2020 portfolio analysis is because I see many of
those experts mentioned above using current events and crises to conflate
sector analysis with economic analysis.
It is possible, for example, to have robust success investing in certain
protective sectors while the rest of the economy takes on a negative
direction. Surely you cannot believe
that an average annual portfolio return above 20 percent such as occurred last
year is sustainable indefinitely, no matter how robustly economic matters
flourish?
Beginning January 1st
of this year your expectations must be re-set to a level which approximates the
"real" facts on the ground.
Storm
clouds
When policymakers
enthusiastically try to establish fiscal and social policy, they become
obsessed by, and captive to, markers that closely align with what they know
from prior experience. However,
demographics, norms, and algorithms are constantly changing, and often trip up
those who fail strategically to think ahead.
The path to dealing with unforeseen crises is thus littered with
impediments that our leaders have never before encountered. The calamity which ensues creates disjunction
and portfolio/consumer loss of confidence.
We are in a 24 hour news cycle, and anything which disrupts the current
norm instantaneously inflicts a chaotic response. Too often market rallies and trends are torn
asunder by knee-jerk response and panic.
It is my judgment that,
given the obscenely high "relative strength" integers of the global
bourses currently, investors are actually seeking justification to take money
off the table without appearing as if they are in a psychological breakdown as
well. Nevertheless, this year should
actually be a strong one for investors if they realize that asset allocation is
a fluid game, influenced by proper methodology, timing, and mind-set.
Our clients might have
noticed that even as the bourses approached their all-time highs last year we
were carefully locking in profits and gradually shifting our asset allocation
to an "aggressively defensive" framework.
This enabled us to weather the fluctuations of year-end considerations
while advocating strongly for our sentiments about another positive performance
this year. Already, our current quarter
recommendations center around yield, capital gains, and longer term earnings
growth in areas such as Basic Materials, Utilities, Financials, and Consumer
Non-Cyclicals. Overbought conditions on
many sectors are still problematic, but our proprietary quantifications (ArlingtonEconometrics) are designed to
mitigate the pitfalls of simply tracking an "average".
Look, I get it. Everybody is looking to maximize their
investment returns, but too often at the expense of fulfilling other objectives
such as risk aversion and capital preservation.
Market risk cannot be eliminated entirely, but reliability of
performance depends upon consistency of message. Always remember that just because you think
an investment looks attractive it doesn't mean that it's the right one for you
or the right time to buy.
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