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)
