Market Commentary for the week of April 27, 2020

Rich man's crisis

Every event is unique.  So, too, are market surges and declines.  The exploration of these events is somewhat predicated upon immutable laws that everyone agrees governs the science.  For example, medical clinicians are looking back at previous epidemics to discern guidance today about its magnitude and probable duration.  When we listen to their study, it is incumbent upon us to draw our own conclusions about how to proceed...economically, medically, and socially.

The analysis of financial things is similarly predicated upon an accepted belief that vectors in economics behave in repetitive, measurable ways.  It is not the analyst's job to legislate social contracts, only to identify them in an attempt to measure their impact upon the economic setting. 

"Crises", by our definition, are not the same thing as that which governs each side  of a cyclical parabolic continuum, up or down, left side or right side.  Rather, they correspond to the rather drastic disintegration to a market cycle that occurs at the top  with rapidity, contraction, and extraordinary financial pain. They are so unusual, that crisis endings are not even considered before they happen, in most instances.  But we are in one now, and if you are old enough to remember, you might recall the previous other two or three that you have experienced in your lifetime (dot.com, for example).

What happens in each instance is that some exogenous, unforeseen event triggers a drastic change in people's outlook.  The excessive nature of that change leads to feelings of distress which, in turn, precipitates panic selling in the markets.  This behavior, as noted above, is no simple correction nor a straightforward cyclical resolution of a trend....it is sheer horror and calamity for those experiencing it.

Each crisis is also unique.  It might be an industry catastrophe, a regional conflict, a financial meltdown...or a health pandemic.  But they all follow a familiar blueprint: a rush from owning tangible assets into a craving to horde cash.

Havens of last resort

One of the intrinsic characteristics about this pandemic is how it has aggravated the perception that the rich have one standard of care while the poor have another.  It is explained by looking at the disparity between rates of affliction in various communities, further exemplifying the breach that existed between the haves and the have-nots that existed before the virus struck.  Of this we are certain: neither the epidemiological nor economic impact of this global pandemic has hastened a solution to the problem of wealth access and distribution.  We are mindful, too, that hunger, poverty, homelessness, and displacement are not limited by border, geography, or creed.

A sharp decline in the prices of certain commodities, like real estate and fuel oils, suggests that there is little pent-up demand right now, even from those who have discretionary cash to fritter.  A moratorium on spending is also something that cannot be "switched back on" by decree.  The hemorrhaging of portfolio valuations, along with the drumbeat of lost wages and jobs in the economy more or less seals the immediate fate of the economy.  A "rocket ship" recovery is not likely in the next few weeks or months.  Further, I believe that your expectations about replicating the returns you've experienced in the recent past must be tempered as we enter the next phase of market consolidation.  The standard benchmarks previously used to evaluate "success" must be tempered by risk management and asset allocation.

Monetary theorists think they know how to handle the crisis...throw money at it and see what sticks to the wall.  There are also political leaders who believe that stimulus can pass for idea creation.  But some of those solutions, themselves, might be as disruptive to our societal balance in the short run as the pandemic itself.

Look, I get it.  This financial/medical crisis is nobody's idea of a perfect way to solve our communal ills and financial aspirations.  But taking those steps we need to now to rebuild our social, political, and economic paradigms just might improve the best possible outcome we could have imagined.

Market Commentary for the week of April 20, 2020

To hunt, you need stealth

Our planet is experiencing rapid and unexpected changes.  Some of those changes are bountiful and some, unfortunately, are catastrophic.  Some of these events are man-made, some are organic and outside the span of our control.  One constant, though, is that humankind is resilient and usually finds a way to persevere.

So too are the financial markets.  Unfortunately, one almost always finds oneself fixated on the micro details at the expense, literally, of the macro.  In the end, it is always our ability to process complex issues, the big picture, that leads to the most rewarding results.  Making money in the investment markets doesn't require high-wire gambits or any extraordinary mental dexterity.  It simply requires patience and the willingness to wait for the inevitable opportunity.

The problem for too many is that hoping  for wealth guarantees folly.  Always comparing yourself with someone else, or any imaginary ideal, is a sure way to jump catastrophically into the shallow end head first.  Last week, several major banks, as well as other industries, reported profit declines up to 40 percent, manufacturing drastically falling, millions laid off or unemployed, as well as retail demand decreases by nearly 90 percent for the past quarter.  Despite the market's recent "bump", these data auger poorly for the kind of Immediate ("like a rocket ship"/ "turning on a light switch") recovery that many are yearning for.  My data sees more of a rolling recovery over many months and years for the economy, as well as the stock markets, which is why I am loathe to bottom fish for devalued securities at this point.

I believe a better strategy is predicated upon measureable statistics (earnings, price momentum, relative strength, etc.).  What matters most in building a quality portfolio is not a fixation upon each of the elements in that account, but rather a focus upon the aggregate asset allocation within the portfolio and a prudent evaluation that over weights leaders and under weights laggards.  As long as one proceeds with that primary overlay, most of the blocking and tackling has already been done.

Last week I alluded to a "forward-looking" portfolio, one which is comprised of securities and ideas that connect to issues of the day and our future.  The context of that thought is that the "viral" issues of today morph into the solutions of tomorrow.

Walk a mile in his  shoes

I am hearing a lot of anecdotal conversation saying that traders can't wait to jump on security "X" today because it is cheaper now than it was two months ago owing to the incredible volatility in the markets caused by the uncertainty surrounding the virus pandemic.  That kind of "panic driven" buying is no more effective to portfolio stability than is the panic driven selling which occurred at the top of the market.  Above all, we should be checking our inner roulette player at the door in favor of deliberate calculation and a sense of calm.

Look around you.  The most effective way to combat cabin fever, boredom, and the virus is to rein in feelings of panic and greed and to rely upon time-tested tenets of investing that don't deviate irrespective of time or circumstance.  One of which is to approach the situation with patience.  Sometimes the difference between folly and fact is just a good night's sleep.

The challenge right now is that we are confronted with a double edged conflict of social and economic disruption.  Almost everything we might do to address the dilemma boils down to a clear evaluation of the facts and the science..... and also to add a dose of humanity and courage to the equation as well.  No one wins if everyone doesn't win.  No matter how bold the speculative opportunity, there is no denying that in the bigger picture we are all in this situation together. 

There are many political, scientific, moral and social issues which confront us, issues that are bigger than just you, the next "hot trade", or one's thirst for revenge upon a portfolio (and market) gone awry.  The "forward- thinker" in us believes wealth building is a product of ingenuity and innovation in solving the agricultural food chain, the disruption of energy sources owing to global conflict, providing clean water to those who are thirsty, sharing the planet with other species of animals, rebuilding the infrastructure, providing quality healthcare in the wake of the pandemic.  The bottom line for forward looking investing is that no matter how the issue might directly affect you today, or your "revenge" upon the markets, there are significant financial and moral challenges that are bigger than just one individual and which might provide capital gains stimulus for the future.

No one disputes that you cannot legislate morality or social consciousness.  Nor can we absolutely incentivize the "right kind" of capital expenditures to address the needs of our day.  More likely, these socially forceful results will derive from human nature and the desire to survive deliberately and healthy.  As these crises wash up on our doorstep, the imperative becomes increasingly momentous. 

Market Commentary for the week of April 13, 2020

Why can't we....?

Up until recently, the kind of economic and social upheaval we are now experiencing was something out of history books.  But now, immersed as we are in viral plague and discussions about respirators, ventilators, PPE, and masks, we are confronted with a new reality.  The fact is that this historic inflection point offers us an occasion to reformulate our thinking about a variety of issues encompassing social, financial and spiritual reengineering.
But keep this in mind: community-making and goal setting is not necessarily about laws and structure of power, but rather about how opportunity is distributed to all members of society.  Education, both in the schools and in the home, is a key to "raising the tide" for people no matter their geography or social standing.
While the work to be done in the future is fodder for debate, most of us are focusing on the here and now.
In many parts of the world the viral pandemic is still rampant.  That has had the unfortunate effect of displacing workers, disrupting commerce, and placing enormous pressures upon our first, and last, line of defense, our medical community.
Likewise, investors are witnessing trillions of dollars of valuation evaporate because markets are declining in the face of uncertainty about a timeline or strategy for recovery.  In spite of last week's buying frenzy, there is still a long way to go before determining the exact bottom.
With that in mind, I believe that we have an obligation to pose questions that deal with today's turmoil as well as  those that relate to a new order which follows. And, indeed, there are so many questions now for which the answers are indeterminable.   For example, we must realize that there is no immediate antidote either for the virus or the economic pandemic. I wrote recently in my Quarterly Commentary (Q2, 2020) that a consumer led recovery is simply not possible at this juncture.  Instead, government and the private sector must create those stimuli.  Also, traditional "fundamental economic analysis" must be held in abeyance for the time being. 
To gain deeper insight, and consistent with my own biases, I subscribe to a kind of "backwards-looking" science, quantitative (statistical) study, which supposes that the evolution and development of a narrative can be "quantified" through the analysis of assessable cycles, resembling parabolic curves......much like the kind we have been accustomed to seeing from our medical and political leaders during their daily briefings when they talk about "trends" and "flattening the curve".  
Yesterday, today, and tomorrow
Because no one, including statisticians, can actually/accurately predict the future, we rely upon past (or recent) modeling data to draw inferences about those events' likely outcomes.  These vectors, plotted on a graph using algorithmic assumptions, can be V-shaped, U-shaped, linear, best-case, or worst-case.  The peaks (apex), just like the lows (nadir), are very rarely points in time, but look more like periods over time (amplitude).  Investors who "speculate" about when the highs or lows in financial instruments might occur are often frustrated by their inability precisely to "time the market" or to build the perfect portfolio.  

One can, however, reasonably isolate the ideal data or metrics which relate specifically to that cycle to construct a pragmatic solution to any given problem.  Not every financial security experiences the same rate of momentum, up or down, concurrently.  Thus, we have demarcations defining leadership and laggards.
Everything measureable in life is a function of time.
I would suggest that we are quite resilient, medically and economically.  Why can't we begin now to envision solutions to issues which heretofore had been unaddressed.  Imagine, if you will, a portfolio for the future, constructed around healthcare, technology, food and water, ecology, and infrastructure.  I'd put that bet up against anyone else's notions.
The financial markets will return...of that, there is no doubt.  However, we must be prepared to orchestrate the sequences properly to identify the dynamics of what will make for a "new" economy, a new social description, one that will appropriately respond to a network which has been irrevocably changed by the circumstance that envelops us.

Market Commentary for the week of April 1, 2020

.....two roads diverged....

 

It used to be that a traveler might have gone anywhere in the world and have been safe from accident or illness.  Until a few weeks ago.

Unfortunately, a plague has overcome the globe, and its pernicious consequences are vast.  Today, a majority of countries, towns, and municipalities are in lockdown because of the dire effects of the Corona virus.  The toll, in lives and fortunes lost, is incalculable.  Before it is over, new systems, strategies, and procedures for dealing with life's everyday issues will become necessary hereafter.

With the dramatic dissipation in valuations in the financial markets, personal and corporate goals and identities will be conflicted for months to come.  We are all beset by issues which, until recently, had not even been contemplated.  More than shooting guns or marching armies, this adversary has ground economic activity to a standstill and made insignificant most sciences studying it.

As we sit here today most of the world's economies are immobilized or already in a state of decline.  The pangs of hunger and desperation are widening.  During such periods, the climate is fertile for despotic pronouncements or ego-driven policies to try and deceive a vulnerable public.

Clearly, the production and supply chains are constrained.  The momentum built up during the last decade is ruinously nullified.  Whereas we might have been "burdened" by a glut of capacity before, the curve has been regressing during the last month alone.  Demand today is not great enough to achieve more than the status quo.

The Federal Reserve and other global central banks are doing their best to inject the system with needed capital in an effort to keep afloat large and small businesses.  Obviously, the small entrepreneur is most vulnerable to cyclical stalls in the economy.  Any reduction in the cost of money might be helpful, although this writer has frequently expressed doubts about the appetite for borrowing money when in dire straits.

As a result, there is little financial inducement that can move markets or consumers simultaneously.  We are facing a period of stagflation, recession, or worse, in the coming months.

When such periods do occur, they tend to coincide with people's worst fears.  The markets recede as a result.  This is certainly not a time to speculate about upside rebounds or bounces.  Value investing, at this juncture is not equivalent to "finding a bottom in the markets".  Throw into that mix the current political/election climate in the US and you get a rhetorical mix of doom-and-gloom scenarios along with high hopes and expectations for the future.

Our real dilemma, though, is how we all react to the situation.  Government leaders are chock full of ideas to create anticipation and stimulus (while warding off the medical pandemic).  Everyone seems to be gravitating to their own parochial interests while the chasms which divided us before the epidemic (crime, immigration, wealth gaps, politics) widen.

No doubt, our living standards will be adversely affected during our adaptation to new principles.  Nevertheless, each person has a responsibility....a "civilian contract"....during this process.  That is what makes for communities, states, and nations.

Actually, we are likely to find our way with greater clarity because of  the pandemic.  Social consciousness, and conscience, cuts through a lot of the uncertainty.  The tenet to love and respect one's neighbor diminishes our uncertainty about how to behave in stressful times.

If history is any guide, there will be enough time to worry about the financial and medical issues confronting us and how to "right the ship" going forward.

Markets

The recovery, when it occurs, will be driven first and foremost by businesses believing in their prior economic forecasting, waking up like Rip van Winkle, and initiating production and services as they did before the pandemic.  Unfortunately, the consumer cannot "lead" this orbit, as is typical in a classic economic model.  The shift and burden will be upon corporations to lead.  The private sector and government fiscal policies must provide the first and best incentives, followed then by the consumer who, hopefully, will engage with increased buying power and confidence that the worst is finally behind him.

Employment...more specifically, re-employment....will be slow in the beginning of the turnaround.  Wages possibly might return to "normal", but slowly.  Profits should increase for many companies, thereby expanding the employment cycle.  The trend which reignites the global economy is not going to look like a "rocket ship"...straight up linear expansion....but rather could take several quarters to revive the "patient".

Those industries that lower costs will rebound the fastest.  Their sales base will increase more rapidly.  Demand in those industries should push the economy modestly forward. To the flip side, those who choose immediately to try and recover lost expenses and revenue, business as usual, will stifle their own growth potential, become more cyclically influenced, and lag opportunities for  valuation appreciation.  

Historically, the most potent recoveries occur when there is buy-in from the public that they are working in concert with the objectives of big business.  Otherwise, recessions persist, public assurance erodes, and valuations continue to tumble.

Conclusion

There has been a drastic decline in public confidence in the past few weeks.  Quantitative studies tell us that when we hit rock bottom, "zero", the only way to go is up.  The question is "when"   and "for what duration"?

The loss of the consumer's engagement does not mean an end to the economic expansion we were experiencing before the pandemic, however.  I am one who is loathe to "sell everything" and then try to time reentry into the market.  You will note at the bottom of this page that our balanced analogues still include equities....not so much as a statement about our immediate optimism as much as a procedural necessity not to run and hide during times of crisis, and to remain consistent with our long-term methodologies.

US and global equities if managed prudently will still provide relevant returns on investment over the next several years.  The principle is quite simple:  our distaste for volatility does not dampen our enthusiasm to play the game nor for a responsible evaluation of science-based economics and opportunity.

As you have no doubt heard and read from me and others, this crisis will pass.  My job is to protect portfolios, navigate the tough times especially, and to dissuade anyone who listens that "straight line investing", up or down, is the norm.

Manias occur when we lose sight of facts and reason.  I offer high probabilities that the seeds are being sown for a better future if we have the patience and fortitude to persevere with tolerance, not only for ourselves, but for "the other guy", as well......  

Suggested balanced account asset allocation, Q2, 2020

Equity:                 20%

Fixed Income:   40%

Cash:                   40%