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.