Market Commentary for the week of March 21, 2022

Two sides of a penny

While war rages between Ukraine and Russia, and markets churn under intense volatility, we’ve noticed a strident dichotomy between two kinds of investor: those who believe this is the beginning of the end, and those who stay the course.  (No doubt, there are shades of grey in between, but clearly there is a dread developing concerning inflation, joblessness, world security, and hope for the future.)

The former are selling out of their investments, locking in profits gainfully won during the past few years, hoarding cash, but also dabbling occasionally in bargain hunting for depressed prices and looking for a “score” of a one or two point bounce.

The latter group are more conscious of spreading their risk amongst a variety of sectors, asset classes…and also holding cash in abeyance.

The biggest travesty however is that the market, once again, has become a micro-managed cosmos, dictated by 24 hour news cycles and instant access to information that is constantly evolving.  In truth, no one knows the real catalysts of market performance, only that data and analytics get tossed aside when emotion becomes stronger than fact.  The reality lies somewhere in between…war might not cause  asset bubbles to collapse, but uncertainty impacts the landscape in overwhelming ways.  Thus, true money management requires adherence to a set of principles which guide performance outcomes before  exogenous influences can happen.

Corrections and contractions are a normal part of investing.  Consider, though, how low interest rates during the past decade might have contributed to the bull cycle by making money inexpensive to borrow and causing stocks to become the only alternative for investors from which to choose.  Now, as central banks begin raising borrowing costs (interest rates) to protect against hyper ventilating the economy, we must try to predict the influence of yet another variable.  Or perhaps higher interest rates are an indication of a robust economy that is charging ahead?

In two years of the Covid pandemic we saw a slowdown in output, hiring, supply chain distribution, and expectations.  If ever there were to be a “bottom” in the markets that would have been it.  And yet, despite the obstacles, the market performed splendidly.  Pent-up demand is fueling the surge…and the shortages…not a change in the underlying fundamentals of global growth.  Good for the economy…and good for your portfolio.

Now we ask, “could the market surge be causing the bubble to collapse upon itself?”   Do valuations sustainably rise in a straight line?  My clients and readers know that I have answered that question again and again.  Markets move in parabolic cycles that can be quantified for duration and magnitude.  Trying to defy the laws of physics and economics usually leads to poor portfolio outcomes.

So what do we do now?  More carnage or more opportunity?  The answer correlates to the notion posed in the first paragraph.  Obviously, higher oil and food prices will lead to greater short-term tension in stock performance.  While tangible assets might have been a safe haven for defensive money, the question remains for how long can those asset bubbles sustain?

Look, I get it.  People hate “losing” money.  However, not all portfolio declines are “losses”.  Reacting with fear or panic to one’s monthly statement is no more appropriate than “doubling down” on losses and trying to speculate about where to find the bottom.  Preparing ahead of time through prudent asset allocation mitigates the effects of market volatility, particularly the declines.  Economists, money managers, and politicians don’t cause market capitulations….gravity does.

Cyclic phase analytics tells us that form efficiently modulates according to time and magnitude.  Zeniths are preceded by nadirs; nadirs are preceded by zeniths.

It will take time to sort out the intangibles in today’s market, or to figure out how the first quarter will impact upon the next 3.  We know that change is a part of the process.  In fact, it is the only  unknown that we can predict with certainty.

Market Commentary for the week of March 7, 2022

Post Road

As so many seminal and transformational events have befallen us during the generations, we have come to define those periods “just after” by looking backwards,  calling them “post-this”, or “post-that”.  For example, “post- industrial revolution”; “post- Civil War”; post-World War 2”; and more recently, “post-Covid”.  Hopefully, and very soon, there will be a “post-Ukrainian War”…..These analyses become the subtext of historical examination in books, discussions, and other forums.  Placing existential threats into context is exactly what historians are expected to do, perhaps so that we might learn from them or forego their occurrence ever again.

I would posit, though, that it is also important to think of the world in a “pre-condition”, particularly as it relates to finance and investing.  To think of things imaginatively, as they might be, and how capital can shape the possibilities of achievements not yet realized.

Certainly, the War in Ukraine cannot be ignored by the capital markets.  But how does one price in the effect of feckless aggression, human suffering, or the threat of a larger global conflagration?  These unknowns might be the most significant of our lifetime.  The shifting of power balances and geopolitics affects everything in our calculus, from the price of goods and services, earnings potential, and even one’s macro overview and optimism about the future.  Asset allocation becomes a primary determinant in the likelihood of portfolio success, both in the long term and short term.  Carelessly buying an index fund leaves one vulnerable to the exigencies of the broader market as a whole.  That kind of volatility is not usually what clients are asking for.  On the other hand, holding cash as an asset class is not thought of as being particularly aggressive.  And yet using cash as an investment allocation decision…not a default fallback...can be an expression of one’s preparedness to take risk in the future when the analytics determine the prudence of deploying those reserves.

What you cannot do is allow panic to dictate either the mood or the action.  Investors must be resolute and determined that their methodology is appropriate to their level of risk-taking.

Cosmos versus chaos

This morning, the cost of gasoline and food is higher.  Supply chain disruptions and, yes, Covid, give us all pause about the upcoming few months.  Sector weightings and careful decision making have never been more important.

The markets will take care of themselves in their own way, at their own pace.  Recent volatility appears massively disconnected from world events…unless you ascribe it solely to profit taking or value buying.  Portfolio managers, economists, and the general public must make decisions now  about how to confront  those real world challenges.  The difference though is that many investors do so under the guise of “today and tomorrow”…not “this year, this decade.”

Our view is that one must approach the financial markets and wealth building with a wider aperture of perspective and an extremely high level of optimism and entrepreneurship.  This is not to imply that one must be a prude, a “Pollyanna”.  On the contrary, a “post-event”  mentality can successfully be replaced with a “pre”-disposition about opportunity and capital gains.  Widespread inflation is a part of our world right now, but not the reason why businesses cannot compete.  Rather, it reflects a buildup in demand during the pandemic that made it impossible to catch up under current conditions.  No doubt, corporate and government sanctions on oil and disruptions in grain exports because of the Ukrainian conflict contribute, as well.  Let’s make portfolios inflation-proof by investing in Basic Materials, Energy (alternatives), and Utilities.  Let’s also prepare for future technology and healthcare needs.  How about feeding the hungry and housing the homeless?  There are numerous ways to buttress one’s risk right now.  We may not know when global conflicts will erupt, or end, but portfolios must be fluid enough not to imply pessimism, but to demonstrate  optimism.  Circumstances, and quantitative data, allow us to infer valuations and sector-specific opportunity before they occur without giving in to passionate distress that might wreak havoc upon hard earned assets.

Looking at, within, and beyond impediments is the knack to building successful portfolio outcomes and the skill which separates the foolhardy in all of us from the entrepreneurial optimist.