Market Commentary for the week of December 20, 2021

 Fin Ed

How to make sense of last week’s turbulent confluence of politics, Covid, inflation news, and the Federal Reserve?  Finding equilibrium in a world in flux is vexing, at best.  Perhaps we need to amplify the premium we place upon managing expectations amongst all the confusion.

Tradition tells us that the economy and the financial markets sometimes diverge from parallel paths. How else to explain a stock market surge, while a large portion of the world’s economy is stuck in wage, job, and health uncertainty?  First, this is not a zero sum game.  Gains in wealth do not insure parity across the board.  The last decade was testament to the notion that wealth does not always “trickle down” entirely to others.  Look, its not profound to say that we exist not just to inflate our own personal portfolio, but to help others succeed, too.  What a cruel world if the rich belittled the poor or ignored their plight.

So how do the agencies of government and finance accommodate the wealth gap?  Sometimes by passing laws or working the levers of power to even the playing field.  The Federal Reserve’s announcements last week are an attempt to quell runaway inflation while still maintaining firm control over the money supply and also propelling the engine of public/private partnership to generate business and profitability.  In my investment discipline, for example, we acknowledge the quantitative irregularities of the real world and use those dynamics to create asset allocation models that reflect both financial and psychological probabilities of trend continuance or dissipation.  Too many are asking for “fairness” where fairness just doesn’t exist.  S&P and Dow Jones averages are at record levels, but not all sectors are creating wealth equally.

There needs to be a reassessment periodically that evaluates performance and intent from our institutions.  People are more secure today than ever before, but many don’t feel so.  “Every man for himself”  is not a creed that leads to good government nor good consumerism.  So how to tackle the news from last week that inflation is rising, stocks are plateauing, and Covid is multiplying...?

Logarithms or intuition?

Despite the uncertainty, opportunity abounds in the financial markets.  In fact, the greatest potential exists when a void is created.  You just have to know how to find it.  Longer term themes do  matter.  They are the essence of creating an investment plan and diminishing the impact of fear and panic when it occurs.  Said another way, ebb and flow…up or down…is the best way, scientifically, to maximize “entry points” and quantitative probability for portfolio growth.

Our current environment of “easy money” (low interest rates) is about to phase out.  Interest rates will rise; commodities prices will rise because of scarcities and higher demand; growth (GDP) will expand as consumers emerge from their psychological cocoon and new initiatives in the capital markets accelerate; employment and wages will grow if/when the Covid virus is contained.  Above all we caution that portfolio allocations must be consistent with risk tolerances and time horizons.  Patience is key.  “Fast money” is fast disaster.

Imagine…..

Investing is not just individual aggrandizement, but rather committing capital to a purpose larger than personal needs only.  The importance of owning and investing in assets is only as strong as the value that accrues to the common good, while still providing comfort to ones’ self, family, health, and community.

Market Commentary for the week of December 6, 2021

Circle the wagons

Two weeks ago, the economic conversation centered around a successful global recovery (from the pandemic in 2020 and from efforts made since the 2008 Great Recession), a monetary and fiscal response to nascent inflation pressures, and flux in the job markets.  Today, the entire narrative has been upended by concern over a new Covid variant, Omicron, and its potential to disrupt the existing forward trends.  Whereas the emphases had been upon what was going right, the stock markets were more concerned in the past 5 days about bailing out before something went drastically wrong.

It’s a fact that we live in a 24 hour news cycle world.  The internet is such that if someone in South Africa “sneezes” the panic it creates might be felt worldwide.  Was the selloff reaction in the financial markets appropriate and proportionate?  Perhaps not…that is why we must follow the science and wait for those answers.  However, it has now become commonplace for markets to react more like a casino than an investment community, dealing the kind of instant pain, or gratification, with which this era has unfortunately become accustomed.

It has to be accepted that we now live in a Covid dominated world until or unless the disease is eradicated completely (not likely) or controlled in a way that it becomes less of a menace to the workplace, one’s health, or one’s psyche.

Our concern though is that the investment world conflates headlines with market trends.  In a cyclical world, what sometimes is up is another time down, and what today might be winning could be a “loser” at some point in the future.  You see, the whole world…especially the stock market…is constantly in a state of flux, moving parabolically along the course of its trajectories.  When retail capitulates, for example, the drug stocks accelerate.  When the economy slows, oil and gas recede while defensive stocks advance.  These transitions occur over time…and time is the most critical element to any portfolio decision and allocation.  In the realm of quantitative science, 24 hours is a grain of sand on a larger beach.

Look beyond

The problem with micro-managing almost any trend is that the analytics are rendered useless without an amplitude against which to measure cycle advance, angle of ascent/descent, or magnitude.  One cannot determine the progress of a patient without a chart indicating a starting point and an expected outcome in the future.  Only time can provide that perspective.

Investors are in such a hurry to cash in on the big score that they lose their perspective, and confidence, in a matter of minutes based solely upon what they hear in a news headline at the top of each hour.  However, in a Covid world, we must learn to adapt, without panic and confusion, to a changing landscape…in our homelife, workplace, and society.  And I believe we will learn to do just that.

As energy resources dissipate we will find alternative energy to fuel our businesses; we will discover new medicines to combat diseases; we will close the wealth gap inequalities which exacerbate the negative consequences of economic disruptions; we will invest in infrastructure to diminish the impact of supply chain bottlenecks; and we will accelerate the progress that we were making in the global economy pre-pandemic.

But mostly, we must step back from assessing everything in the context of our 401-k valuations each market close and learn to elongate our perception arc more closely to approximate the real value of investing in protracted strategies and sectors that impact the world for the long run.  Overall, our market optimism remains intact despite the overwhelming uncertainty that gripped the markets last week.  As is always the case when selloffs occur, wreckage lays strewn all around.  But this is absolutely the time to be focused on buying the secular long-term trends in energy, agriculture, healthcare, infrastructure, and technology.   

Market Commentary for the week of November 22, 2021

Almost done

It has been a bizarre year for earnings. Despite higher prices and blockages in the global delivery chain, a massive infusion of retail spending (mostly caused by two years of frustration with and pent up demand in the economy) has caused profits to expand beyond analyst’s expectations.  Although the aggregate demand curve is sloping upwards driven by the holiday gift-giving season, we believe that earnings acceleration will run out of momentum in the next year, limiting the percentage gain probabilities for equities.

Historically, the most potent bull markets in stocks are underpinned by significant consumer confidence.  And while the spending component is certainly there, as noted above, confidence levels are mostly negative.  The pandemic’s effects are being felt not just in our healthcare and lifestyle patterns but also in our attitudes about how things are being perceived.  Behaviors are changing and the fragility of “comfort” is being reevaluated household to household.

When the pandemic arrived everything shut down, affecting the demand curve as well as the supply chain.  Everything we “knew” to be true was tossed aside in favor of survival mode.  Distribution and acquisition of goods and services was a function of inventiveness and creativity, good fortune, and preparedness.  We rediscovered the value of family and good health.  Business’ warehousing and inventories evaporated.

Today, supply issues are evolving, as they always do.  Some trends, such as communication and medicine, were accelerated by the crisis.  Our society’s obsession with instant gratification comes at a cost…adaptability.  One’s expectations defines the limits of tolerance for any new paradigm: investing, lifestyle, or otherwise.  Some adapt more easily than others.  Consumption habits are evolving to the supply chain issues.  Not surprisingly, those with financial means have adapted more easily and gained superior access to the necessities of life…food, healthcare, housing…. thereby widening the wealth and culture gaps that existed before the health crisis.

So, who is to blame?  That, unfortunately is the subject of a tome at another time and place, although we see no value at present for recriminations about “what if?”

Wealth versus net worth

The dramatic rise in net worth during this post-pandemic market surge is being fueled by rampant speculation in financial assets, bloated expectations, and historically low interest rates.  While balance sheets are expanding one must ask whether a double digit rise in the stock market is, at its core, the same thing as building wealth?  It is worth noting that the percentage of the populace benefitting from the market’s largesse is extremely small (as a percentage of the overall population) because much of that growth has occurred in real estate, machinery, and intangibles like patents and intellectual property.

Expansion in valuations can make certain investments unattainable for many, while also increasing the likelihood of an asset bubble like the kind which decimated the markets in 2008.  Low interest rates might make the cost of money inexpensive but the increase in debt worldwide means a large bill is yet to be paid…and by whom?

Our thesis is that productive wealth-building  is the best way to solve the planet’s needs with investments in infrastructure, health, climate, energy, environment, and agriculture leading both our fiscal and moral compass towards capital gains and emotional well-being.

 

 Happy Thanksgiving!!

Market Commentary for the week of November 8, 2021

Not why, but how

Current events conversation is punctuated by a lot of headlines and analysis about why things are as they are...inflation, supply chain bottlenecks, unemployment, poverty, social change, stock market records.  But investors really need to focus not so much on the why  these things occur but on how  to mitigate their negative impact upon portfolio performance.  And the best way to do that is to be consistent in applying an investment discipline which best matches one's risk tolerances.  In our case, advancing from point A to point B is a function of strategic asset allocation, cycle and phase measurement, and statistical analysis of macro trends.  Our quantitative discipline is a paradigm not only for identifying potential winners in their space but also underweighting laggards especially those challenged to keep pace with vast generational changes in the global realm.

There are many risk management strategies, the most successful of which rely upon preparation and preparedness in advance of  inevitable twist and turns in the economy.  Something as simple as buying a stock might entail hundreds of factors.  Every macro silo can be evaluated for its durability and long term social relevance.  Couple those data with client preferences about risk aversion and you ultimately create symmetry amongst all the asset classes and choices one has to make.  Once again, our guiding thesis is that asset allocation, itself, plays a greater role in the probability of portfolio capital gains than does any individual security within that portfolio.   For example, there is a greater appetite for socially responsible themes in today's marketplace than at any time in the past two decades.  We attribute this to a change in values brought on by the horrific effects of the pandemic and society's greater appreciation for personal responsibility and caring for others.  Thematic investing also organizes the marketplace into secular ideas that cut across specific sectors, geographic boundaries, market capitalization, and political ideology.  We see areas such as water, agriculture, life sciences, alternative energy, ecology, and infrastructure as having that impact, particularly in emerging markets as they mitigate the headwinds caused by the global health crisis.

Bear in mind that the Wall Street firms have also metaphorically “found religion” during this time and are saturating the media with commercials featuring walks on the beach, retirement homes in secluded mountains, and using earnest Senior Vice President spokespersons looking directly into the camera telling you how much they care about you.  Online trading platforms make a feverish pitch to convince you that it is “simple” to trade your way to prosperity, as if making money is...and always will be...a straight-line riskless endeavor.  Be forewarned about any gambit that tugs at your heartstrings when you feel most vulnerable.

Fool me once...

Media perpetuation of these stereotypes would be amusing if it weren't so sad that the real percentage of clients who have the means to effectuate these “riskless” wealth building strategies is such a small number, while the rest of the population are feverishly trying to keep pace with household finances, mythical benchmarks, their neighbors, and other unrealistic expectations about how the other half lives. 

Successful outcomes in life requires patience and discipline...something in short supply right now.  Let me give you a personal example:  if you watch the professional golf Tours on television, a showcase for the best players on the planet, you come away thinking that you, too, might achieve a modicum of success on the golf course just by going out and teeing it up on any weekend.  And yet the hours and years of practice required to attain their proficiency is lost on most of us who go to the driving range and beat balls, without guidance from a professional, believing that it's “easy” to master the game.

Some people understand the limitation of their abilities.  Economics and market strategy is the same experience.  Wealth building does not come easily or without study of trends, portfolio allocation methodology, and a strong dose of social consciousness.  When collaborating with a professional the money management relationship can be rewarding and profitable...but most definitely not compatible with a “must have it now” culture so many are seeking.  Breaking any big process into several small attainable steps is key to imagining what the ultimate result might look like.

Market Commentary for the week of October 25, 2021

The other shoe

Here we are, just a few weeks into the final quarter of 2021 and people are looking around trying to figure out how much they earned in portfolio appreciation during the first 9 months of the year and whether or not it is too late to try for one more “big score” before the end of the year.  Bear in mind, though, that the markets adhere to no such artificial constraint such as seasons, quarters, or months.  Rather, the economy flexes to its own pulse, and although one may try to pigeon-hole the data into neat little categories it is only through the passage of time that analysts can look back and understand the dynamics of cycle shifts and trend changes.

Nevertheless, there is always a relentless sense of urgency projected by investors at the end of the calendar year.  This is magnified by the fact that we live in a “want it now” culture, that access to trading on the internet makes everyone an “expert”, and that the markets seem more to be a “gaming table”, inducing a gambler's physical and psychological addiction to the stock and bond markets rather than a true commitment to social change and capital formation.  Looking at the investment landscape as your personal tax-planning event obscures an opportunity to make money in the long run.  It is an annual ritual to look at things personally, usually with poor fourth quarter results.

As earnings-driven investors we believe the indices could be negatively impacted for the next few months owing to an impingement upon corporate margins caused by rising costs of production, supply chain slowdowns and bottlenecks, and a consumer who is extremely concerned about the effects of Covid 19 (and variants) upon his livelihood and discretionary spending.  Curiously, our overall economic optimism stems from the fact that those aforementioned "bottlenecks" are not the result of true shortages in raw materials, but because of a colossal pent-up demand/purchase cycle released following the pandemic.  Failure to plan and build up inventories is why we are where we are today.

It's not that bad

Already this year the markets have seen a contraction from their highs of about 6 percent which we believe might magnify to double digit rates in the coming quarters.  The timing of a slowdown is obviously influenced by exogenous factors, but we feel comfortable noting that the trend lines are topping out, all the same.  Irrespective of fiscal or monetary efforts to intervene, the real variable still rests with consumer attitudes.

Yes, they want  the economy to improve, they yearn  for a cure to the pandemic, but their heart tells them to hunker down against an unseen foe that could wreak havoc upon their retirement plans, education funding for their kids, and their next vacation commitment.

All this being said, we believe that there is sufficient room on the upside for equity valuations to flourish and for entrepreneurial opportunity to generate capital gains...if one widens the aperture of perception to include issues that cut across sectors, countries (geographies), and market capitalization over the next generation.  The market is not a linear creature; it does not go up in straight lines forever.  Nor is it a quixotic wager of the dice “on black”.  The first half of the year was a bonanza for investors in the wake of a massive pandemic lockdown the year before.  Now, we look to hold on to hard won gains, ride the wave downwards if necessary, and brace ourselves for the next round of asset allocation rebalancing when it comes.

To be sure, the next 75 days will be important, not because of their impact upon your portfolio performance or any specific economic data, but exactly for the opposite  reason: it is vital that investors remove their ego from the epicenter of micro matters and micro portfolio management and look outside of themselves at things which matter to the planet, their community, and their neighbors such as replenishing forests and waterways, feeding the poor, finding cures for disease, rebuilding the roads, cleaning the environment, and educating our next generation.  In the process, there are capital gains and value-added wealth which can accrue to your investment account.    

Market Commentary for the week of October 1, 2021

 Parallax Dysphasia

 

Gaze up at a starlit night sky and you'll see thousands...dare I say, millions...of shiny orbs punctuating the darkness.  Each light appears “next to” another and there are wide arrays of shapes, brightness, and patterns.  From our perch on earth the tapestry is two-dimensional, a canvass of shiny objects.  Yet, in reality, the sky is a three-dimensional time and space continuum.

Without mixing improper metaphors, let us say that the landscape of financial securities is equally as three dimensional even though on paper all securities appear to be residing side by side, just the same.  As with the stars, financial instruments originate from different timelines, geographies, and sectors; traverse not just a two dimensional framework on a graph, but occupy a network of varied planes, vectors and velocities.  The point is that while some objects appear to exist in close proximity to others, they may, in fact, be unrelated, non-correlated, or simply in a different space, altogether.

Why is this metaphor noteworthy?  Because investors have been eagerly drawing parallels between events, statistics, and valuations that simply do not correlate to the same timeline even though those data appear to be congruent and confluent.  This parallel disconnect is something about which I have written previously and forms the basis of what I title Parallax Dysphasia.

Thus, as the world emerges from a financial, medical, and moral pandemic it might appear as if  all data converge equally to result in common outcomes and common opportunity, but nothing is further from the truth.  While the confluence of current events might converge neatly on a graph, the fundamentals necessary and sufficient to estimate our three dimensional macrocosm are hidden in plain view.

Foremost of these errors in reckoning is unwittingly convincing ourselves that the rise in stock prices is alright as long as we keep those record valuations separate from the disaster wrought upon others by the pandemic.   Leaving  the “other guy” to fend for himself irrespective of our moral obligation to each other incurs a staggering cost upon the rest of the global economy.  Nowhere is the comparison more stark than the gap between the wealthy and the poor engaged in a life and death daily struggle for food, security, housing, education, and peace of mind.

Those of us in the financial world callously are taught to believe (only) that everything in economics boils down to profit and loss.  Conscience is an immeasurable quantity and obviously not the first statistic found on a balance sheet.  Strange, too, because business knows how to feed the hungry, splice genes, cure disease, produce water and electricity, and educate our children. The infrastructure for doing all these things exists, or can be created.  But, as our educators taught us, business reverts to profits first.  Eliminating human malady is not a line item in the budget.

The second error investors make is defining all regions of the globe uniformly.  Not everywhere are resources in equal supply.  In fact, the industrial nations are richer because of  access to infrastructure and natural resources; the poorer countries lag behind in both. Scarcity of capital and natural resources perpetuates the cycle of lifetime heartache that afflicts millions of people.  These things are taken for granted by those who have them, coveted by those without.  Thus, that look at the heavens, the stars above, might seem tranquil from millions of miles away, but we know that the sciences tell us much more about the intricacies of life that are not always visible to the naked eye.  Here on planet Earth, one's zip code, skin color, or nationality is unfortunately a stronger precondition for acquiring wealth and status than any other variable.

Markets

These are but two small examples of how defining, describing, measuring, and investing in a vast backdrop of potential opportunity is both subjective and objective in nature.  We are all faced with decisions whose subtleties determine the outcome of making money in the financial markets.  Whether one has the patience to sort through that process is a factor that also most often affects the outcome.  But consider: just having the luxury of being able to invest already puts you in a strata above the vast number of "others" who have no such opportunity.

The pandemic may have held data in abeyance, but did relatively little to quell the years of progress and momentum built during the past decade.  Yes, there are supply chain issues currently, and much talk about price inflation and earnings reductions for the immediate quarter, as well as local and international geopolitical wrangling.  These are man-made changes in the culture and climate, but there are organic shifts taking place as well.  Some of these patterns are of short duration while others are generational.  But above all, each of these paradigm shifts can be quantified from inception, their timelines graphed, and the probability of duration measured.  In almost every case, from ecology, climate, and infrastructure to healthcare, biotech, and technology there are strong positives and enduring stochastic integers.

The world is being transformed in ways that were unfathomable decades ago.  How we shop/consume, receive medical care, produce our foods, harvest water, communicate, travel the globe and outer space have gone through remarkable change....and the pandemic, in our opinion, accelerated some of these generational shifts for the good.  What once might have been unimagined is now a part of everyday life.

Market returns are exceeding historical pace.  Even the most optimistic forecasts failed to foretell today's levels.  We believe that secular themes are poised to do even more.  Those things that contribute to a cleaner, more sustainable future (medicine, energy, agriculture, technology, e.g.) are the investment opportunities for the next generation.  Emerging markets will gain access to internet capabilities that will be more affordable, and start to reshape their former financial limitations and psychological  boundaries.  As a result, an expanding “middle class” widens the window of prosperity, and puts the previously impoverished on an equal footing for sharing wealth.

Strategy

As more of us look at capital as an influence agent, as well as its traditional role in building net-worth, there becomes a keener appreciation for structuring social stability and political consensus to maintain equilibrium.  Rather than depleting the globe of its natural resources it will become possible to nurture and replenish them.  Randomness and unpredictability affects everything from tangible assets to alternatives.  The appetite for participating in socially responsible investing (SRI) is growing, not because of the "vogue" factor but because it is the right thing to do and the most secure way to build profits into one's portfolio in a highly capricious world. 

The last 18 months have certainly heightened anxieties about the future.  Hypotheses that were always assumed to be true have, by necessity, changed and evolved quickly during the pandemic.  Life's minutiae and daily survival have supplanted long term goal-setting.  Many of us are asking “What are the costs of guessing wrong?”, or “How much longer must we endure this disease?”

Informed asset allocation helps us to diversify risk while still seeking to maximize profits.  We advise caution going forward, in particular lowering our equity exposure for the near-term....there simply is too much uncertainty surrounding the financial markets and the economy to know when this cycle of contraction will end.....but it will  end.   The essence of our quantitative methodology is to generate return (alpha) while limiting volatility or causing harm to profits already won.

Conclusion

Understanding not only the potential  but the consequences  of investing creates a responsible mindset about how money influences our world.  The pillars of our proprietary method involve balancing anecdotal experiences and extraordinary supposition against  economic data...earnings, price trends, relative strength quotients, and sector relevance.....to outperform traditional benchmarks, a task we have done successfully for over 4 decades.  Today's landscape has never been more consequential, nor more controversial, replete with a unique opportunity to conquer anxieties and build optimism for the long-term.

 

Suggested balanced account asset allocation, Q4, 2021

Equity:                38%

Fixed Income:   32%

Cash:                  30%

 

 

 

 

 

 

 

 

Market Commentary for the week of September 20, 2021

Advancing...by retreating

Over the past many months I have written extensively about the need for investors to focus their horizons away from  the immediacy of micro managing daily news events and looking towards  macro themes, particularly in socially responsible investments, which benefit both the economy and portfolio long-term performance.  Having a strategic perspective is helpful because it changes the emphasis from reacting to emotion and anxiety of everyday news to pro-action  and methodology applied to science and measureable data.

But not in today's missive.....

Instead, I want to reflect upon last week's virulent activity in the markets whose gyrations reflect a downshift in economic activity for the near term caused by the great uncertainty wrought by the Covid pandemic.  I will begin, however, by reaffirming two primary tenets of the marketplace: (1) it always makes sense to plan for the worst because the panic caused by failure to anticipate can be catastrophic to portfolios  and (2) asset allocation plays a greater role in the probability of generating portfolio capital gains than does any individual security within that portfolio.

Having said that, it is important to review where we are today and from where recently came.

Recall that over a decade ago the markets were roiled by a global collapse of the credit markets.  Some of the problem was “man-made” while some was inevitably predictable given the half-decade prior of unbridled optimism and abuse of the system.  More noteworthy, though, was a total obliteration of consumer confidence as homes were taken away, jobs lost, industries closed, and competition thwarted.  Recall the era of chaos, confusion, and despair which permeated the financial tapestry.  As nearly always happens in the bizarre world of parabolic quantitative analytics, the “bottom” of that crisis represented the most opportune moment to plot and strategize for the probability of a rebound turnaround.  And, in this instance, the last twelve years have been, without interruption, a near-linear upside spike in valuation and wealth building.

The premise of quant science, however, is that straight lines are anathema to creating probability and cycle distributions.  I believe that there are always zeniths and nadirs; phenomena are always traversing a certain direction at measureable wavelengths (magnitude and amplitude); life is not a series of straight lines, but rather a grouping of phases heading towards a final objective, up or down.  Unfortunately, a graphic depiction of financial bourses over the last 5 years looks like a linear (straight line) progression, manic in its ascent.

Be careful to note that the stock market is not the same thing as the economy-at-large, nor is everyone's investment experience/result identical.  Some have netted a remarkable rate of return during the past decade, others less so. Others, even still, have fallen behind immeasurably.  There is no denying that the income gap is widening and opportunity favors the wealthy.  The determining factor in most all those outcomes was the amount of capital a person had to invest and the amount of speculation (gambling) they wished to take on. Stock picking alone is not a methodology nor a strategy.  And for those who can afford to play the investment roulette wheel...be grateful for your bounty.

Without question, the past two years of suffering under a global pandemic has created question marks out of every absolute we knew to be true.  Today, there is a heightened probability of chance, change, and reevaluation for almost all financial metrics in our toolbox.  Forecasting the future velocity of trends will be more difficult unless we can defeat the ravages of illness and virus.  Annual and recent quarterly sales figures are waning, inflation is accelerating, supply chains are dwindling, and emotions are fraying.  Indeed, day-to-day challenges are manifest in almost every activity we undertake and likely to challenge even the strongest of theories, causing collateral damage in the short term to portfolios and gains hard won in the past.

We are a generation of instant gratification.  The more our expectations for immediate success are thwarted the greater the likelihood of panic or contraction in portfolio valuation.  It's not anybody's fault.  It is a necessary cycle phase that we need to be aware of before resuming “normal” patterns of expanding opportunity.  At this moment, lethargy and laziness are traits no one can afford to accept.      

Market Commentary for the week of August 30, 2021

Not easily dissuaded

In the last decade, making money and building net-worth through investing has been relatively “easy”.  A proliferation of growth opportunities prompted an influx into the markets by seasoned and novice players, alike.  The love affair between investors and financial speculation grew even stronger as portfolios expanded and alternatives contracted.  For those with sufficient capital means, double digit annualized returns were the payoff of their fortune hunting.

There is a new paradigm taking shape as a result of the pandemic and other cultural/philosophical shifts in the world.  Until last year, the financial markets were not as much a “life and death” issue as they have become today.  We are forced to think about and deal with our mortality and our place in the world, including our beneficial wealth.  Most notably there is a change in mind-set when interpreting data because the ticking clock on our existence places that information into a time constraint that heretofore had not been part of the equation.

Make no mistake, our secular overarching view remains unchanged: the financial markets are now and will continue to be performing at record pace.  Nevertheless, one must be proficient at balancing macro optimism with the realities on the ground.  Unexpected events and their consequences are always a part of planning for portfolio building.

Historically, the most opportune time to invest is at the “bottom” of a (parabolic) cycle.  And while valuation today remains quite high, a collective sigh of relief after the pandemic ends might be just the elixir we need to recalibrate the velocity for the next wave upwards.

When and how?

Another big shift in the markets today is a focus upon sustainable, socially responsible assets.  For too long, these sectors have been relegated to the back burner (energy, commodities, cyclicals) in favor of the sexier, more popular trends (technology, healthcare).  However, efficiencies in data analytics make it difficult to ignore the anecdotal and quantitative probabilities that exist for these sectors which improves the prospects for investing in education, infrastructure, utilities, agriculture, and other categories which, previously, had been under the radar.  It is increasingly obvious that business without conscience  is a lost leader when taking into account the long term value of capital gains.  While it is always difficult to look past the obviously recent choices, it is also important to mitigate volatility and risk by looking further down the road than instant gratification from the here and now.

The last decade of economic expansion was punctuated by significant shifts in productivity and employment.  The secular bull in place now is well supported by capital spending, investment banking, sufficient cash reserves, and prolonged earnings expansion that makes likely a developing business cycle for several years hence.  As mentioned earlier, there will always be unique “negatives” that apply, but none are sufficient, we believe, to derail a cyclical bull phase with any intensity.  At worst, we expect the data to be supportive of new business initiatives and problem solving for the globe's ever expanding needs.

The loss of life, property, and financial valuation caused by the business recession and pandemic have been particularly catastrophic to the psychology  of investing.  But a decade of base-building cannot easily be eroded; perhaps all we might be experiencing is a net-zero impact when we look back on the carnage.  Monetary conditions are extremely favorable worldwide and profit acceleration will continue to underpin positive probabilities for wealth-building. The process itself, however, requires patience, discipline, methodology, empathy for others, and conscience.

Market Commentary for the week of August 23, 2021

Out of the bunker

Everyone knows by now that the economy has been profoundly affected by a once-in-a-lifetime viral pandemic.  We must now come to accept that politics, economics, and health have been indelibly changed.  Exactly what those changes are or how they will unfold in the future is the great mystery.

More people are working from home; fewer are patronizing business; and technology is evolving to keep pace with the times.  Jobs have been lost and others created...both at record pace.  Industries are evolving, disintegrating, or closing altogether while others are only being born.  Educational institutions are finding their way back to “normal”.  The recuperation of our personal relationships is far from complete.

There are examples of how the generations are responding differently to the crisis.  The young have a lifetime to adapt, the older population has lost a limited number of years to reflect.  Either way, these are extraordinary times.

Unfortunately, the health pandemic has also exacerbated gaps that existed in other areas of our lives...gaps in pay, wealth, equality, and opportunity.  Finding solutions to these issues is not for the meek or complacent.

As investors ponder the future the answers can be found in their methodology, their timeline of evaluation, and their level of patience and perspective.  The Covid outbreak has made everyone more aware of a finite lifespan, as well as one's place in the world around them.  Menial things and daily gratitude have taken on a whole new meaning.

the long view

Consumer optimism is still high, but somehow undirected.  Having a day-by-day approach to things hinders the effectiveness of an investment plan for the future.  Nightly news headlines are not conducive to building a solid portfolio.  It is vital to take the measure of things from a wider aperture...earnings, capital appreciation, and asset allocation.  Consider that the setbacks we have just experienced might have a net positive effect upon how we construe things going forward.  If we seize the chance to refocus it is possible that entrepreneurship and opportunity could flourish for the next two decades and beyond.  Capital always seeks a vacuum.  For all the concerns about geopolitics, global competition, and sustainability, the search for comprehensive solutions to the problems of our globe portend a fascinating investment landscape.

These things are not simply matters of economics, finance and government.  The fundamental of all society is that people can work together to benefit each of its members.  The answers lie in our moral compass and commitment to others.

Thus, we see potential in the emerging markets as well as the mature ones.  Growth and innovation are borderless and class nondescript.  Currency deployed effectively will build infrastructure, feed the hungry, provide for the common defense, educate the needy, advance technology, and find cures for rare diseases.  That looks like a pretty hefty portfolio alignment to us.

Despite our optimism about the data, there are always roadblocks to overcome...in the short term and long term.  Dips in the market will occur, we can assure you of that.  However, the current angle of ascent of the economy and the financial markets is strong and probable to maintain.

Market Commentary for the week of August 2, 2021

 

“E” commerce

The markets fumbled again last week with this notion of earnings versus inflation, as if that choice was the only one.  Yet, Thursday's economic growth numbers came in at a reasonable 6 percent for June, not unreasonable for a post-Covid summer recovery.  Seemingly, all is forgiven as long as equity valuations continue to go up.  But this kind of mental jousting is extremely shortsighted and counter-productive.  Look around...sector rotation and generational change is happening all around us.  Those pivotal trends....ecology (climate change), healthcare (including disease prevention and control), internet and technology, and social dynamics (poverty, hunger, housing)....will combine to dictate the future of capital gains and investment opportunity.

The major political, emotional, and operational imperatives of our time are dominated by Covid, wild fires, flooding, and infrastructure failures...obstacles that must be overcome in the short run but which currently eclipse the repurposing of any capital expenses going forward.

Interesting, that investors' fixation upon data harvested exclusively from the internet has supplanted what used to be conventional methods of appraisal.  In today's world, one man's belief is sufficient to influence markets irrespective of the legitimacy of his opinion.  What used to be time-tested science has been discarded in favor of a more immediate calculus:  if it fits the moment, it must be true.   In a hierarchy of relevance, speculation and greed have displaced sustainability and fact.

Look, there is no doubt that modern internet technology is a boon to science, economics included.  It is no longer necessary to wait for tomorrow's Wall Street Journal to find out what is happening in financial markets around the world today.  Almost every piece of literature ever written can be found on a computer device.  My family, and maybe yours, scoured through our Encyclopedia Britannica each year (am I dating myself...do any of my readers recall using an encyclopedia?).  What once required a trip to the library can now be accessed on one's cell phone.  However, an epidemic of disruptive behaviors and opinions permeates through covert channels which only contributes to impulsively manic conduct and deliberation.

Classical investing is being beaten back by self serving impulses by which the value of things are imaginary for the purveyor's own interest.  Crypto currency and other fabricated payment options only exist because we allow the ascription of meaning to their creation. Without federal support or guidelines, these currencies are akin to the Wild West.   Why not go back in time and bring back the tulips, jasmine spice, and silk threads?

It has always been my calling card that “sustainable” (socially responsible) investing (SRI) is supported by data and secular anecdote.  These are areas where profitability has proven to do well and to do “good”.  Environment, agriculture, water, biotech, and energy provide sufficient diversification and leverage within portfolios to span generations of innovation and problem solving, responding to problems not just in the present but for decades hence.

No doubt, the more eager amongst us seek short-sighted opportunity.  Looking at the current one year market cycle, we, too, believe that valuations are extended.  There is significant upside resistance ahead which prompts the kind of sell-off that has been happening in recent days.  Even as these pullbacks offer a well deserved pause, there is still sufficient base building in the market overall to withstand a bear swoon. The idea that price pressures  are an impediment to market progress is erroneous in our view.  Rather, they signify an upturn in economic activity and demand which lay dormant during the pandemic, and represent a continuation of the recovery begun in 2009.

Be forewarned, however, that short cycle pullbacks are part of the normal course of things that occur within broader bull markets.  Capitulations are not cause for panic or emotional defeat.  Across the spectrum, there is potential not yet realized.  Too often our attention is sidetracked from emerging opportunity to obsess, instead, upon the immediacy of local politics, exogenous influences, or personal self-interest.               

Consider, if you will, that empathy also has value to our long term expectations.

Market Commentary for the week of July 26, 2021

 

Conditional pauses

Equity trading got off to a horrific start, then recovered nearly fully, last week as investors feared that the economic revival and upwards trajectory of business might be stalled out by a new surge in variant (Delta) Covid cases worldwide.  Trading volatility...mostly selling...harkened back to the height of the pandemic last year during which all sectors were vulnerable to any reported slowdown in economic activity.  Needless to say that confidence is a fragile thing right now.  Particularly hard hit on Monday were the discretionary industries, those reliant upon heavy “traffic” such as travel, energy, and retail.

Adding to investor concerns was a surge in prices, the result of pent-up demand from months of dislocation, and a fear that any slowdown in business activity might mark the passing of the high water mark in the resurgence.  This could also be the onset of stagflation, an insidious consequence of higher prices congruent with business calcification.  In truth, all the talk about inflation, alone, maiming the recovery was supplanted by concerns that the real culprit might be unrealistic growth expectations.

The issue is now, as it has been for several months, is that until the Covid virus is eradicated or contained the likelihood of a robust rebound is nonexistent.  Thus far, an inability to inoculate large percentages of the population, for their protection and that of others in their community, has been an intractable obstacle.  Vaccine hesitancy is both political and personal.  All told, these data make for a confusing picture about economic (and health) prospects.  Thus, the violent sell-off early last week.

No doubt there were already questions about a continuation of the market's trajectory, with many predicting a correction within the long term bull (please refer to our July 1, 2021 Quarterly Commentary).

Which way is up...?

This begs the question, “what constitutes a normal market?”    As quantitative analysts our theory presupposes that numerical statistics exist to guide in the creation of probability of performance and overall portfolio asset allocation.  Mathematics endure, they are science.  There is no probability greater than 100%, nor any less than “zero”.  Therefore, the range of outcomes for any measurable pattern falls into a bell shaped curve.  Our array of macro guidelines consists of over 100 factors but might practically be pared down into four primary subsets: earnings, earnings acceleration, price performance, and our proprietary ArlingtonEconometrics stochastic rankings.

No doubt, as with many other analysts, our integers were already bursting at the seams, making a further high less likely.  That doesn't mean that we are about to enter into a bear market or that the expansion is over.  Rather, it is always productive to take a time out to reevaluate risk and rebalance portfolio allocation.  When integers climb as high as they did in the first half of this year one can only be reminded that you can't fill a vessel “fuller than full”.

Ascribing the stock markets, or any financial capital enterprise, as a casino  is always problematic.  Investments should not be thought of as a one-off exercise, but rather as a procedural method combining highly correlated data whereby risks are looked at in the long run...a macro overview...towards which consistency of return becomes the anticipated outcome.  Chaos erupts when the markets are condensed into hourly games or speculative mania instead of a wider aperture of perception and a longer-term timeframe. 

Despite the fact that some impulsive strategies might have yielded short-term success in the past, such behavior in a strict portfolio sense is often associated with steep risks and excessive losses.  Investors eager for a big payday aren't aware of their hazardous behaviors, which only intensifies their addictive desire for more.  The damage is already done when you initiate the game without a process, methodology, plan, or self-control.   

Market Commentary for the week of July 1, 2021

 Inflection

In the wake of Covid-19 the investment landscape is shifting quickly and dramatically.  There appears to be a new paradigm for valuation and macroeconomics, one which migrates away from strict integers and encompasses a “moral”, or socially responsible, consciousness in addition.  We believe that shift to be a boon to investment portfolios, particularly as global uncertainties recede.  There is a new focus upon demographic and technological changes that emerged from the pandemic which encourages a greater emphasis upon sustainable environmental protections, healthcare, and social governance.  More so than in previous generations today's thematic investments offer the combination of anticipated portfolio wealth-building as well as strategies for “doing good” for the rest of the world.

More specifically, however, is the question of whether or not those factors can be sustained in our collective psyches as new standardized benchmarks for growth and prosperity, or whether or not this post pandemic feel-good moment is just a fleeting illusion.  As investors wonder “what's next” the new reality becomes a challenge of evaluating opportunity in a wholly redefined landscape.  The pandemic affected not only our health and financial reckonings but also our attitudes  about those things, as well.  Should it not be true that what is good for the possibility of our investment accounts should also be good for the common sense of our social fabric and our responsibilities towards others?  We believe that both can be affirmed concurrently.

There are several other factors which support our guidance that the markets are poised for a new era of wealth creation.  Demographics become destiny.  A demand for new technologies will have a dramatic multiplier effect upon healthcare, transportation and infrastructure, education, and energy.  Global central banks are still maintaining a hands-off approach to inflation, keeping interest rates (borrowing costs) low.  The end of the pandemic also incentivized corporations holding large cash reserves to start anew to endow innovative initiatives, begin to rehire displaced workers, and to think about the longer term once again.  And it is the long term that has us excited about profit expansion and capital gains.  There might be a period of modest contraction off of today's high valuations in the next two quarters but the runway for generational transformation and capital expansion is almost certain to be hectic.

Markets

One year ago investors found themselves at the depth of pessimism about the condition of their world and their spirit.  Today, otherwise.  So, what happened?

For one, the markets last spring and summer were driven by an inordinate amount of short term trading and speculation...on the way down and throughout the “bottom”.  Many thought that the best strategy was to bail out completely, hoping to avoid any portfolio depreciation, at the risk of abandoning all asset allocation protections taken earlier (that were designed precisely to mitigate just such a crisis).  After the hysteria wore off many of those same individuals were the first ones calling their portfolio advisor to get back in  to capitalize upon valuation decimation that ensued.  For all the confusion and turmoil, the year-after, net-net should have been to restrain the hysteria and to stay the course.  We are now at, or above, those previous, pre-Covid, valuations and rewarded for our persistence, patience, and methodology.  The real issue is that micromanaging stock returns usually backfires, does not begin with a macroeconomic overview, nor always end with the desired outcome.  For sure, there is now a greater appreciation for conventional portfolio method that reflects patience and discipline.

No doubt, ratios, prices, and earnings are quite high at this moment.  But integers must be viewed through the perspective of sector rotation, geography, science, and ethics.  In other words, our preference is to monitor patterns of revenue and asset growth that shape the markets and the economy for the long term.  To be clear, there is no such thing as “perfection”.  But quantitative science deals in the realm of probabilities.  And right now those probabilities are at an encouraging inflection.

As noted above, the next few months might be riskier.  There is widespread concern that pricing pressure (inflation) is a bogey to be feared.  We believe otherwise...that price pressure and higher interest rates are a harbinger of a renaissance of an economic expansion that was occurring before  the pandemic arrived.  The last 3 or 4 weeks of this past quarter were a manifestation of the market's inability to see the forest for the trees.  Investors vote with their cash, and currently they are losing faith that upside momentum can be sustained.  Any volatility and doubt, we believe, should be short lived and not a reflection of significant deep-seated headwinds.

The fact that the economic recovery (from 2008) was interrupted by a health crisis rather than by underlying fundamental elements is cause for optimism that the longest, largest economic expansion in recent times should continue.

Strategy

There is a troubling undercurrent that people are not only losing faith in market sustainability but in their other entrenched institutions.  Lawlessness is on the upswing, unemployment is still a lingering a problem, schools are half-empty and doing a poor job of educating their students, government is stalemated, the racial bias gap is widening, and community agencies are behind the eight ball when it comes to feeding the hungry and providing shelter to the homeless.  Our collective social disconnect, and the fissure between the haves and the have-nots, is wider than ever before.  The fact is that one's choices are today dictated by their zip code, age, religion, geography, ethnicity, and capital reserves. One may not like it, but it is part of the truth that must be confronted.   We may never go back to the old normal, because the devastation wrought by Covid-19 has created a period of introspection, revolution, and perception that has changed our realities forever.

There is  space for capitalism and market optimism, but also for sturdy fundamentals and vigorous profits that give back to the less fortunate.

Conclusion

After a year of market turbulence, emotional suffering, and death we must approach our economic and social sciences with a new perspective, one which applies proven principles of supply and demand, profit and earnings...and, yes, moral philosophy.  There is no statistical formula for personal happiness, but nor should we always try to equate market valuation to that integer.  In fact, our economic and spiritual rebound can be even more robust and substantive if we apply new vocabulary and new thinking to the endeavor.  Whereas asset allocation and sector weighting are the hallmarks of this author's quantitative methodology, determining which industries will flourish in the next 20 years is just as much about ethical ideology as it is about stochastic integers.  From chaos, order.  Particularly in areas that affect public welfare such as environmental protection, renewable energy, agriculture, potable water, education, technology, housing, infrastructure, war and terrorism (population migration and displacement), and social responsibility

Trying to understand the connection between emotions, objectives and facts is not just an ideal...it is our new imperative.  How our cognitive biases influence our investment choices creates the financial maelstrom.  Learning what is driving the rapid changes that we are all experiencing is not a pedestrian exercise......  it is a complex, multilateral conundrum that takes time to understand.  Unfortunately, we live in a world of immediate gratification.  The digital age makes us aware of and responsive to a multitude of stimuli minute by minute...all-time highs, all-time lows.  Instead, it is time to understand that wealth is a partnership, created over time, between ourselves, our hard work, our money, and the benefits of which that accrue to others.  Real wealth  (resources) differentiates between method and impulse, expectations versus behaviors.  Therein lies the riddle of modeling the future.

Suggested balanced account asset allocation, Q3, 2021

Equity:               40%

Fixed Income:   40%

Cash:                 20%

 

 

 

 

Market Commentary for the week of June 7, 2021

 

Cautiously accelerating

The virus threat is receding, the equity averages are expanding, and there is finally a sense of “normalcy” returning...at least more so than when the world was (literally) in the death grip of the pandemic.  One of the most significant after-effects of the last year is the way in which people are reevaluating priorities and the meaning of what it is to be “healthy and wealthy”.

As a result of all the stresses we have experienced...the loneliness, solitude, and grief brought on by death and the consciousness of our mortality....many have changed their perception about what they need or require for happiness.  Unfortunately, it took a calamity like Covid-19 to change beliefs but, just like markets themselves, it sometimes takes a capitulation of dynamic proportion to recalibrate quantifiable expectations.

For many, the threshold for a well-fulfilled life isn't as high as once imagined.

Change is a part of life.  Values and relationships have supplanted the need to keep up with unrealistic financial expectations.  Perhaps the lessons have been learned, perhaps not, or maybe only fleetingly.  Perception sometimes is  everything.

One such perception is that the wealthy were more prepared to ride out the health and financial crises than were the less fortunate.  Indeed, discretionary money is a luxury not afforded (no pun) by everyone.  Thus, as markets have rebounded upwards so too did the financial well-being of the rich.  This was not the case for the less well-off.  In fact, the “recovery” is still a myth for those in lower socio-economic strata.

Revising expectations

So what, then, constitutes wealth?  For those who aspire to it, it seems that it is the accumulation of “more toys” than the other guy; a constant comparison between one's starting point and an expected end point, almost always defined by what their neighbors have or do.  Curious, though, that there are cultures is which being rich is defined by the quality of one's soul, family experiences, and relationships to the community at large.  There are no right or wrong answers to this conundrum, simply that which meets one's own criteria for happiness and fulfillment.

Too often, however, Wall Street contributes to these erroneous definitions of wealth by disseminating advertisements equating status and wealth building as “my money equaling the other guy's, plus-one”.....  an unfortunate standard by which thinking of oneself first, the other person second, and never having enough to be happy is compulsory for a well- lived life.  Through good times and bad, sell-offs and phenomenal gains, Wall Street perpetuates the notion that your status is achieved by inching your nose just slightly ahead of the next guy.

I get it.  It all comes down to goal setting and personal preference.  But there is no standardized definition of wealth or achievement.  The big banks may roll out the red carpet for their “premier” clients, but in the end we all occupy the same human space in our communities.

The magnitude and amplitude of the global recovery cycle varies across regions, heavily dependent upon local vaccination levels.  This divergent structure is creating a unique investment opportunity based upon county and sector-specific fundamental changes.  Last week's inert market demonstrated that there are serious revisions taking place in earnings expectations and in rotational leadership, forsaking the  “front end” engines of the economy (discretionary staples, cyclical companies, industrials, etc.) for the more daring inflation-driven models (commodities, financials).  We do not believe that current price hikes represent a secular change in the inflation picture, but rather a temporary surge in costs brought on by pent-up demand and shortages in the supply chain.  We caution our clients to prepare for more volatility in a post-pandemic economy feeling its way towards a new normal.  We also urge restraint in judging others, because ultimately, how we feel  about the changes in our world is an intrinsic effect for everyone to explore to relieve the distress around us.