Market Commentary for the week of February 22, 2021

 

How it might look....

The markets serenely started last week to look something like the post-pandemic recovery we have all been waiting for, as a secular rebalancing took shape, looking nothing like the era which preceded it.  Instead, investment rewards appear more so to be deriving from private and public partnerships that focus upon streamlining solutions in healthcare and other segments which deal in the welfare of the public at large.  In our view, these deliberate changes in the investment tapestry will be significant.

There is no deviation, however, from traditional definitions which underpin an effective economic marketplace: strong earnings, high yield, and long term planning.  Simply trading on “value stocks” is not sufficient to tackle the problems of our times.

The globe is facing undeniable challenges, including but not limited to hunger, poverty, social and economic injustice, an aging population, depletion of natural resources, and a scarcity of potable water.  The real issue, though, is that we have a massive inefficiency in delivering these scarce resources to regions that need them the most.

The price tag of rebuilding that collective infrastructure will be massive.  But, as many have pointed out, the cost of inaction today, of failing to confront the social quandaries of our time, will make the expense much later even more prohibitive.  Right here in the US the devastation upon infrastructure wrought by last week's winter storms is incalculable.  It only makes sense that our best efforts be manifest today to confront the moral, political, and investment issues that face us tomorrow.

What if the budget were unlimited...hypothetically?  Would that change the calculus for getting to work?

...not a drop to drink

Water...for example....covers nearly two-thirds the expanse of our planet.  Yet, a similar percentage of the population suffers from a lack of dependable access to this precious commodity.  The situation will not “self correct”, nor improve without capital initiatives.  The crisis derives from many known sources, such as overpopulation, climate change, population migration, and industrialization.  This missive is not comprehensive enough in time nor expertise to elaborate upon all the permutations of and possible solutions to the issue.  But we do know that money, itself, is not the only pathway to improvement.  When tackling comprehensive problems there are two measuring sticks: the systems we put in place to deal with the structural problem; and the final solution as measured by the number of people helped by those efforts.  Each can only be as good as the other.

During the past several decades ArlingtonEconometrics has blended quantitative analysis with economic fundamentals, composing portfolios which epitomize companies engaged to the global water crisis.  By superimposing our criteria for earnings acceleration, price performance, algorithmic trend analysis, and long term sustainability,  we have vigilantly crafted a complex of equities that echo worldwide projects in desalinization, hydroelectric power, purification, transportation systems, and other components of delivering potable water to the underserved.

The capital markets are, and always have been the engine of our future.  Many institutions and high net worth individuals have long recognized that integrating silo-specific, highly targeted, sector oriented investing, particularly in areas of socially responsible subject matter, can be extremely effective in identifying probabilities of capital gains that complement the overall framework of balancing risk within their portfolio.  Money efficiently applied to these specific needs always moves the needle closer to achieving basic human rights and strengthening human values, morality, and hope.  These things, and others, may seem like a lot of money being cavalierly spent.  But when an investment produces returns for shareholders as well as providing for the common good the expense is worth it.  The biggest commitment is the mental one.  Is there the courage and self-belief that making a difference for the future of the planet is the right thing to do....

Market Commentary for the week of February 8, 2021

 

Paying a premium

The markets retreated somewhat last week from the internet mob-induced volatility of the week prior, although it bears noting that the specter of it having been done once now festers in the background.  The volatility continues, but hopefully a keener vision prevails.  Our inclination is to play rallies, not dips.  The sheer volume of speculation driven by internet chatter must be looked at as an aberration, not as a validation of some underlying fundamentals. In fact, fundamentals are infrequently driving valuation, for all intents and purposes. 

Although our discipline, quantitative analysis, is mostly regarded as a “reactive” science, one in which statistics are evaluated from past trajectories, these data can also identify price and time progressions which are expressed numerically as future probabilities.  Prudent use of these stochastic integers helps us to look forward, for example as they relate to economic/political trends in infrastructure, energy, manufacturing and technology.

There is strong profit potential in each of these sectors, across a wide spectrum of geographies, in the next 12 months.

The offshoot of the maddening chat room speculation is that the markets lose sight of the forest for the trees, creating price bubbles that erupt, and disrupt, the orderly flow of trend cycles.  It is fair to say that when these roadmaps disappear, the chaos left behind is shattering norms.

Headlines and hyperbole are not strategies, they are non-scientific emotional crutches.  Most of the rallies borne of speculation are really fears of being left behind, not a conviction about what lies ahead.

Search, don't surrender

Last week we wrote about how a lack of alternatives in fixed income is fueling stock speculation.  While this might be problematic it is not a death knell for investors.  At worst, it is an inconvenience for not having another “parking place” for your money.  Low interest rates are elongating the cycles in stocks while dramatically skewing the denominator in our calculations.  As a result, the numbers sometimes provide a false hope about the continuation of up cycles.  To conclude, we see the perpetuation of daily new highs in stocks as an unfortunate consequence of low bond yields.

If, however, the global economy does rebound this year in a post-pandemic world, there is a likelihood that interest rates will tiptoe slightly higher.  What impact might that have upon the already bloated stock markets?  There are innumerable issues with which to deal, including the dreadful unemployment numbers that came out last week...and the several months prior...healthcare delivery inefficiencies; social justice and criminal reform; hunger; poverty; and homelessness.  Despite all measures taken monetary, the real solutions are fiscal, political, and moral  in nature.  Our biggest concern going forward is how and where earnings acceleration locates and how to take advantage of these shifting secular patterns in our client portfolio allocations.

It looks as if the market will be punctuated by one-off earnings successes and targeted sector rotation rather than an across-the-board acceleration in all categories for the next few months.  Avoiding any exogenous and unexpected risks should be our primary focus.

Crises and recovery have always been a foundation of investing.  For nearly four decades we have navigated these traumas by creating silo-specific portfolios including Health and Life Sciences, Alternative Energy, High Yield, Socially Responsible, and our two most recent offerings in Global Water  and Global Food and Agriculture.   By focusing upon specific needs, these portfolios also complement our endeavors in wealth building for institutions and the ultra-wealthy.  New initiatives are forthcoming in areas of social and secular change such as Technology  and Infrastructure  utilizing our proprietary  (ArlingtonEconometrics) database, always preserving our focus upon the possibilities and the future.     

Market Commentary for the week of February 1, 2021

 

A good start

Last week's bizarre market volatility was a foreboding prototype for the battle between long term, thematic investing versus micro, “in the trenches” trading.  The story of how a populist mob taunted powerful financial institutions by manipulating markets using on-line chat rooms proliferated the news.  It is a tale as old as investing itself: buy low, sell high, with an expectation of fantastical riches; only this time punctuated by excessive greed, malice, and malevolent misuse of internet technology.  Fundamentals versus fervor.  While last year might be remembered for the unfortunate ravages of Covid, the challenges going forward are to try and find ways to balance these diametric forces while delineating those trends which endure.  There is hope, however.  Early statistics indicate that companies are pivoting from staving off virus-related disaster towards building back personnel, supply, and demand, where possible.

The pandemic exposed gross shortcomings in numerous categories, including delivery of healthcare, the food supply chain, and social justice.

The rules for making money in the financial markets are disparate.  Some people look at data as a tacit endorsement to see the world in a way that fits into their own bubble.  Yet, personalization of facts doesn't always produce the best portfolio result, nor the broadest of answers to hardships that befall others.  Political affiliation, culture, morality all play a role in weaving together an efficient portfolio tapestry.  Science is also a critical component for building wealth.  But in the end, bridging the gap between fact and hyperbole is what leads to unarguably strong investment outcomes.  In a world increasingly parsed by anecdotes versus data, one cannot afford to jump from here to there...then back again....searching for the golden goose.  Biotech today...IPO tomorrow.  Gold...then consumer durables.  Chasing fads is exhausting.

There will always be ambiguity associated with portfolio construction.  Idiosyncrasies are what make the exercise fun.  While diversification might help to lessen some volatility associated with uncertainty, it is not the only answer.  Being “human” means to add nuance when making investment decisions.  Certain hunches pay off, others not so much.  Successful portfolios are as much about avoiding the big gambles and losses as they are about discovering the largest home runs.   Thus, scientific method and macro modeling create better performance by quelling unbridled emotion and quixotic strategies.

“Discipline 007...discipline”

It is much easier to assess the financial landscape from a proverbial “30 thousand feet up”.  In that regard, sustainable trends become much more obvious than when thrashing about in the weeds below.  It is clear, as mentioned earlier, that expanding multiples and higher valuations in certain sectors are creating higher risks.  At those levels, underperformance  becomes the bigger deterrent to putting money to work.

The single most essential factor mitigating stock risk today is that interest rates are at historically low levels.  The traditional risk/reward alternative investment scenario (between stocks and fixed income) does not exist, rendering the only conclusion one might draw: there are few options for building portfolio wealth other than equities at the present time.  Therefore, we are moving cautiously towards building representative sector weightings in stocks for those clients who can absorb the risk.

In a yield-scarce marketplace, what choices exist for meeting the challenge of income oriented portfolios?  This quarter our recommendations focus especially upon dividend paying Non-Cyclicals, Utilities, and Financials. 

Last year, at about this time, we were approaching the apex of a magnificent run-up in financial assets.  One year later, we are still near some of those parabolic highs, albeit with a wider skepticism about the underpinnings of our social fabric.  Solving those communal problems will depend upon a more equitable distribution of opportunity and capital.  War, poverty, hunger, homelessness, disease, rebuilding infrastructure, and replenishing our energy sources are undeniable factors which overlay the search for market performance.  We don't view those integers as absolute representations of status quo, but rather as directional indicators of what might be.