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.