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.
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