Market Commentary for the week of March 22, 2021

Normalcy

We found last week's market order to be less disconcerting because of a reversion to “normalcy”, devoid of the kind of panic and crisis that had characterized much of the platform for the past few months.  As a result, it becomes easier to see real pent-up demand and which sectors might be the beneficiaries.  Spending leads to more spending; corporate valuation increases (hopefully) leads to new hiring, innovation, and activism; employment gains improve wages and consumer hope.   While the numbers perk up let's not forget that an improving economy is not the same thing as an improving situation around your kitchen table at home...bills to pay, children to feed, goals to be met.  The Petri dish that is our global economy discovers, discards, develops, and enhances global trends, both new and old.  Retail prices, demand, and expectations all took a valiant step forward last week simply because the markets didn't overreact to hidden suspicions.

However, to suggest that the global economy is “heating up” would be an exaggeration.  Interest rates are historically low, meaning that the money spent on debt service is also quite low.  Central bankers announced last week that they intend to keep the status quo on borrowing costs.  Consumers are dipping one toe in the water, not jumping in full-bodied...at least not quite yet.  If and when interest rates do move higher...as suggested they have already...then it will be an indication of better business,  not higher inflation.   The market is galvanizing, the crisis is receding (not gone), and we are moving in the right direction.

Fanduel architecture

Even as the pandemic recedes, however, a curious behavior is hard to shake.  Many investors with whom I speak are still consumed by their short term expectations of market trading in lieu of more “traditional” long term strategies.  This is a vestige of last year's buy the dip and recovery  philosophy which occurred in the context of once-in-a-generation health related catastrophes.

“How come my portfolio isn't up 35 percent when XYZ Corporation is exploding upwards in price?”, they ask, forgetting of course that these gains are occurring after precipitous price drops...some as much as 50 percent declines...and significant portfolio rupture for those who couldn't get out of the way of the decline in time.  The incredible risk of a sports-betting mindset builds into a frenzy which imbues importance to insignificant speculative chatter.  Investing is not just whether the Yankees defeat the Dodgers; Manchester beats Milan; or Springboks beat the Bulls.  At its essence, investing is goal setting, patience, and avoiding big losses.  We reap the kind of markets we sow.   Buying low...then buying again even lower  is not always a winning investment strategy.

Understanding the bigger picture, the enormity of problems that capital investment can solve, such as global hunger, energy development, infrastructure, and the eradication of disease, increases  the probability of successful portfolio outcomes and makes debatable the notion of bottom-fishing sudden declines at the expense of “going long” abundant opportunity.  No doubt, there are myriad numbers of ways to invest.  The devil is in the details and the promises of which strategy compels belief in the best outcome for you.

The market system isn't broken.  Rather, it is the shortsighted ambition of those who seek vast alchemic wealth, spun from next to nothing, that causes them their greatest frustration.      

Market Commentary for the week of March 8, 2021

 

Rates, rates, and more rates

Question:  Where do you think global stock markets would be if interest rates weren't  low?

Fortunately, we haven't had to answer that question in recent years.  However, with interest rates modestly spiking upwards in recent weeks investors were confronted with exactly such a dilemma, and the turbulence which ensued.  The distraction caused by having to ponder higher borrowing costs, higher inflation in goods and services, and the possibility of an equity market in free-fall set investor's comfort level back by a considerable margin.  One is only left to wonder what, when, and how a post-pandemic hyper-inflationary global economy might look.

Obviously, no one can accurately predict the future nor the answers to those questions above.  But we can discern certain trends, certain probabilities, which are becoming clearer as the viral scourge recedes.  For one, any rise in interest rates becomes an indicator that expectations for global growth are expanding.  Bear in mind that this is the first sign in at least 15 months that economic forecasters are bullish.  In a climate devoid of much good news over the past year even the prospect of inflationary pressure becomes an important nugget.  Buying stocks in the past year had become a default option for many investors.  Now it appears to be a harbinger of some underlying breadth in the fundamentals.

We are not abandoning caution, however.  Safely deploying capital always requires a prudent assessment of risk...by asset class and by process.  For obvious reasons, betting it all on black  ensures nothing but a 50-50 proposition of winning or losing, outsized losses versus outsized gains.  Any manipulation of the markets based upon interest rate projections alone is shortsighted and speculative.  Adding additional risk to portfolio management based upon one indicator is not part of our vocabulary.

Instead, we think it appropriate to consider the impact of a nascent expansion in the economy as an opportunity to fine tune asset allocation and to redistribute assets into sectors with emerging and/or consistent staying power.  Currently, we think that rotation away from aggressive speculation, and back into defensive equities, is the most durable way to segue way back into the markets here at the top.  Those modest interest rate hikes in past weeks are not statistically significant to derail the recovery or to change risk correlations.  Quite the contrary, they are precursors of a next-generation expansion.  There simply is not enough of an inflation risk at present to abandon long-term macro expectations for appreciation in the coincidental and laggard portion of the marketplace.  Examples of where we would put our money include basic materials, utility shares, consumer non-discretionary, and industrials.

Gratitude

One other critical component to that process, particularly in the (almost) wake of the Covid pandemic, is a healthy dose of gratitude.  From amongst all the critical factors we review daily, including earnings, yields, trend analysis, stochastic relative strength integers, and price patterns, we believe that creating an environment of soulfulness, understanding how lucky we all really are, is critical to building long-term macro success in the portfolio management process.

We must consider how capital can and should be used; to reach out to the less fortunate; to give something back; create kindness and offer constructive opportunity to our fellow planetary travelers.  Gratitude might take the form of a friendly utterance to a stranger, a kind word at work.  But it might also represent a full-bore commitment to our air, water, food, natural resources, and other things that can improve the quality of life...as well as building profits from so many disparate sources.

As noted, no one can precisely foretell the future.  But there is finally enough of a cycle shift taking place that we consider the exogenous noise of headlines and newsworthy commentary simply to be a part of a larger tapestry whose direction is more clearly taking shape.