Market Commentary for the week of January 31, 2022

 Who’s fault?

The stock markets took us on a frustratingly confounding ride in the last two weeks.  Remember this, though, that despite being down for the year, there has been a virtual bounty of gains during the previous decade.  It shouldn’t be a surprise that stretching the boundaries so far could be perilous.  But more on that in a moment.  First, picture this:

“Your child’s third birthday party.  All her young friends are there, gathered in the backyard.  Burgers and hot dogs on the grill.  A cake with three candles sits on the large picnic table.  There’s a pony ride for the children.  A balloon man has the kid’s rapt attention.  As he fills the balloons with air the children implore ‘more, more!!  A light pink orb expands to its limits, nearly (but not quite) ready to explode.  Your young toddler is so proud as she parades around the yard with her inflated new toy.  Suddenly, a stiff breeze.  Her balloon is tossing in the air.  Without warning….it bursts!!  Loudly. A hush falls over the youngsters, then your precious little baby starts to cry.  “Why did it burst, Mommy?’ she sobs.  Was it the wind?  Her carelessness?  Was the balloon too full?”

Now imagine this:

“The stock markets are making record highs.  Your shiny new car sits in the driveway, a conspicuous symbol to all the neighbors that things are going well.  That spacious new outdoor swimming pool in the backyard was recently financed by the bank with a low interest loan.  Your suitcases are all packed for an impending family vacation you had been promising them.  You just got a promotion and a bump in pay.  The country club dues are paid off for the year and the kid’s college tuition…although a stretch to the household budget...was finally approved by the bank.  And without warning...the market bursts!!  Loudly.  A hush falls over the household.  You bravely hold back your fears and tears.  You call your money manager.  “Why did it burst, Paul?  Was it all an illusion?  Was I careless?  Was the market too full?”

Paying a price

No doubt, the markets have been very good to many of us, setting new records and outperforming (overperforming) against all benchmarks and expectations.  But straight line anything  is always an aberration in a sine wave kind of universe.  In this case, an unyielding unwillingness to acknowledge that the “game” is always fraught with danger made buying financial assets and counting on “forever returns” a fool’s mission.  As quickly as these things can end, one must always plan for the unexpected…which in this case was mostly anticipated.  How far can you stretch a rubber band?

Look, I am an optimist by nature and an investment Bull.  My weekly commentaries are full of information telling you how my “left side of the parabola” bias lends itself to being “long” financial assets.  The crux of the matter, though, lies within three factors: discipline, expectations, and reality (data).   Currently, I believe that investors are lacking a healthy dose of all three.

The gain in financial valuations over the past few years has been a remarkable achievement.  Relish in it, appreciate it, enjoy it.  But please don’t be surprised or upset when the tide turns.  Even a modest capitulation in valuation at this juncture should leave you with more than you started with.  You must be able to manifest a certain gratitude about your privilege and rewards and recognize that the resource bubble raised your lifestyle and net worth along the way.

I am often accused of being too conservative, not aggressive enough in packing portfolios with “hot ideas” when the markets are percolating.  To the contrary, our 40-plus years of representing high net worth clients is replete with asset allocation rebalancing and sector/trend analytics that capture a dexterity in mitigating risk and growing assets that many “gamblers” do not possess.  Unfortunately for the uninitiated, playing the asset game is simply not a straight line proposition, despite a compulsion to add risk in the face of adversity.

The promise of “getting rich” must be tempered by a calculated approach that recognizes humility, gratitude, methodology, and patience all at the same time.  Beyond the bubble might lie tears, but always…always  an opportunity for economic resurrection.   

Market Commentary for the week of January 18, 2022

 

Consommé…..or just plain soup?

The financial universe is just beginning its post-Covid transformation with broad stroke initiatives that offer a panoply of competitive opportunities.  Unconstrained by geography, index, or sector there is a new emphasis on lessons learned from the crises that incorporate key elements of business, psychology, and finance that coalesce into consistently superior returns on equity along with sustainable life affirming principles, irrespective of the economic cycle.

To that extent, the marketplace of capital gains (and change) is going global and quite dissimilar from the “me only” movement of the last decade.  Integrating fundamental research alongside social consciousness helps identify leadership that can endure despite daily market fluctuations. 

The case for this enlightened sophistication is steadily building.  Stakeholder capitalism  means businesses create effective profitability with the other goal of generating positive social impact for their community and the world at large.  Indeed, recent anecdotal evidence shows us that the connection between “doing good” and “doing well” is the engine of regional stability, financial security, and structural purity.  That vision…that mission…sets a new standard for ethical and responsible decision making.

Make no mistake, this transformation did not happen overnight in a vacuum.  It is the culmination of many factors, some already known prior to the pandemic, whose confluence today is making it more palatable for boardrooms and kitchen table analysts to consider.

Above all, the widening gap in wealth and social equity/equality pushed us all to reevaluate any  system that doomed the disaffected to fall further behind.  Values based lending and finance that lifts up all of its community members creates an inexorable bond between government, family, and spiritual institutions.

The future of our planet has never been more clearly in the hands of its inhabitants, nor more acutely recognized as our responsibility.

Bending the arc

These changes are redefining investing, too.  One can no longer exclusively play the stock picking game.  The purpose of money…which once was “green” (profit/greed) is now also “green” as it reckons with our ecology, our values, and the role that financial markets can play in dissuading harm inflicted upon others.  It finally looks as if businesses are starting to integrate “good governance” as a line item on their balance sheet, bettering society while building prosperity for their shareholders.

This evolution also requires a change in the mindset and expectations of investors and the financial community.  Sustainability (SRI) prioritizes long term goals over short term reward.  One needs to find an enlightened comfort zone that intersects performance with mitigating volatility.  Failure to do so increases risk to the portfolio in the long run.  The degree to which immediacy  can be disentangled from altruism  will be the next “variant” the public discusses when it comes to determining the best way forward.  We need to demand a standard by which we hold business accountable for their rhetoric and their action.  No doubt, the most relevant new initiatives will be those which focus upon moral, financial and structural development.

The next wave will be about monitoring the progress of this complex menu and to demand that impact initiatives  become a priority.  Without a set of standards by which to operate there will always be the chance of backsliding into the past.  Best practices  is not just a phrase, or an ideal, but rather a system of accountability, reporting, regulation, and evaluation that reaffirms a commitment to each other.

Revenue is the lifeblood of any company and, like sausage, how it gets made isn’t often a pretty picture.  The inflation numbers reported last week (up 7% year over year) only tell part of the story about what falls to the bottom line and the future of our economy.  While others obsess about the immediate impact upon a balance sheet, we will gladly trade that concern for an optimism about a future with clean water and air, disease prevention, sustainable energy resources, and a conscientious business environment.   

Market Commentary for the week of January 1, 2022

 A “Hard” Year

A most unusual two years has changed the dynamic of the world we live in and forced us to redirect our thinking about the marketplace from goods and services towards tangible assets.  Driven by major events and secular shifts, capital gains opportunity in commodities and other “hard” assets might be at its greatest in years.  In addition, areas such as technology and healthcare are compatible brethren to inflation-like themes for the coming year.  A proliferation of venture capital into these areas is emblematic of global entrepreneurship and the breakdown of traditional borders like geography, capitalization, and sector.  Today, more millionaires and billionaires are being minted than ever before.  Opportunities abound for capability in water research, ecology, agriculture, and alternative energy.

 

The global pandemic upended norms and business structure.  While life has not fully returned to normal, financial assets have done more than just “recover” …they have flourished.  Despite the uncertainty about associated headwinds, there is no reason for the market not to continue apace.  The differences are, however, in which sectors might thrive.  Investors have been pushing the limits of valuation in traditional front-end leadership suggesting that it is late in the game to be speculating in cycles “at the top”.  Price to earnings (P/E) levels imply significant premiums are already being quoted for those benchmark companies.  Thus, it is vitally important to seek out secular and thematic shifts to take advantage of higher stochastic probabilities in a changing world.  We always favor the “left side” of the parabola versus investing at the apex.

Markets

There is a voracious appetite today for sustainable investing…what once was called “Socially Responsible Investments” (SRI)….because their economies of scale have matured in the last twenty years and because we have become more aware of our mortality as a result of experiencing the ravages of the pandemic.  Improved business models and heightened demand compare favorably to their predecessors’ early development in those industries. In point of fact, SRI makes up the daily fabric of our lives…food, water, air, energy, science, technology.

Because these businesses represent enduring capacity, versus capricious cyclicality, their shares are becoming more attractive to investors looking to enhance return, durability, and social conscience.  Of course, as with any equity there is always exposure to risk, volatility, and exogenous noise.  But these businesses also allow one to express critical desires to improve the planet while also building diversity amongst asset allocation.

Our research in the global water realm, for example, crafted a model portfolio nearly a decade ago of some 30 stocks whose collaborative effect was to address issues like desalinization, filtration, access, hydroelectricity, distribution, agronomy, beverage-making, and purification.  We reduced the risk of venture capital investing by looking for earnings, first and foremost.  This provided us an investment filter by which to mitigate the idiosyncrasies of early stage volatility while also building diversification amongst the various business categories.  These stocks take time to mature, but their “performance” has been exemplary thus far.  SRI has been somewhat sublimated to the dot.com technologies for nearly two decades.  Now it is their turn. 

Analysts and investors are conceding that policies and priorities which benefit the globe can also be good for market and economic growth.  More significantly, investing for the common good drives responsible decision making.  In the broadest sense, the globe must address inequity and underdevelopment in areas such as infrastructure, agriculture, housing, transportation, energy, healthcare, and technology.  These must be non-denominational, borderless, and apolitical issues.

Breakthroughs in science and business make it possible for other sectors to advance, as well.  Innovation is not limited to the above referenced equities.  It is fair to say that there are never enough ingenious uses for technological advances.  New industries are now creating, and will continue to create, demand in areas that didn’t exist in the last half-decade.  A compelling reason to think “long-term” is to acknowledge that commitment takes time to mature and that the needs of the planet are constantly evolving. 

Seeking the “big score” is an investment fantasy and arguably not consistent with having the patience, vision, and resilience required to build net worth for the long run.

Strategy 

We believe that monetary and federal agencies are recognizing that pricing and population demands are forcing their hand when it comes to sustainable solutions, fiscal equity, and production/supply policies.  This is a generational shift that is long overdue.  Responsibility for the planet portends a host of innovative informational options in the business, educational, and governmental arena.  Investors are also making a prudent methodological shift, assessing all risk in the context of timeline, and social mindfulness.  There is an inflection point afoot and it remains to be seen whether it has permanence.  Although the markets might be at record levels, interest in the next social wave is spreading.

The world’s economies are at once cooperating on social reforms and at loggerheads at the same time.  Ukraine is a mobilization point for democracy versus authoritarianism.  North and South Korea are in a decades old standoff.  India and Pakistan have a history of political and military mistrust.  Not to mention the African and South American continents as incursion zones for China’s economic and political spread.  It should come as no surprise that the financial markets are a host for optimism about the future while also a flashpoint for worry and hesitancy.

The US economic boom cannot allay real concerns about an intersection of inflation, overvaluation, and a decline in confidence brought upon by 2 years of health concerns.  Talking about sums, like $500 million or $1.2 trillion, will not resolve the more immediate reality that as long as the virus persists so too does an era of consequential doubt.   We don’t see this as persistent or secular, just an immediate nuisance. Our politicians must make a good faith effort to assuage not only our financial difficulties and inequities but our psychological fears as well.

The wealth gap is a good place to start.  This crisis says as much about our moral compass as it does about the direction of legislation and compassion.  Bills and laws may have expiration dates and target projections, but there should be no limitation upon our leader’s efforts to include all citizens in the munificence of this country.

If and when empathy and compassion are included as a “line item” in the legislative process logic would conclude that there is reason to hope.

In the meantime, our focus will be on developing investment initiatives that focus on the social sciences, the fixed income markets, and consumer confidence.  Conditions are conducive to an expanding economic marketplace and focusing on what is right with the world rather than on what is going wrong.

From “thirty thousand feet up” it is easy to see that the groundwork for expansion has been in place for the last ten years.  Despite the conflict wrought by the Covid virus the case for a continuation of global development and collaboration is exceedingly strong.  Productivity, rather than just consumption, is a major shift that can move markets upwards.  In such an environment employment will be robust and wages will follow.  Rewards will be reaped by those companies on the cutting edge of innovation, streamlining, and sales.  Unfortunately, there will be companies and industries which fail to keep pace with history and may die off.  As with all generational trends, this is the price of an evolving landscape.

Conclusion

The immediate future does not promise a rose colored recovery.  We have been exposed to a deadly, powerful disease that is not likely fully to abate anytime soon.  However, we are of the opinion that markets will recover more robustly than many think.  As long as companies meet the citizen’s need for participation and inclusiveness, as well as increasing market share, there are excellent opportunities for capital appreciation in industries perhaps not yet even imagined.  The way to alleviate the psychological and financial doldrums many of us feel is by providing important developments in things that are inextricably woven into the fabric of a moral and robust society.

Suggested balanced account asset allocation, Q1, 2022

Equity:                 45%

Fixed Income:     35%

Cash:                   20%