Just a matter of time
With all the components that make up
the “financial markets” it is easy to get distracted from the core objective of
investing: preserving assets and increasing net worth. One’s sense of optimism or pessimism is deep-rooted,
but how you execute that belief is the expression of courage, hard work, and
educated guesses. Above all, one must
not lose awareness that the market is not the same thing as the economy. Any perceived correlation is mostly
accidental, sometimes arbitrary, and definitely in the eyes (and expectations)
of the beholder.
That having been said, there are
indicators that can often be used as guideposts. For example, one would assume that a rising
economy should be a pre-indication of a rising stock market, correct? Well, it is certainly getting harder to
discern between what is good news and what is bad news, what is up and what is
down.
Consider that in my last missive I discussed
both the moral and specific cost of agriculture (food) around the world. When you go to the grocery today I am sure
that you notice the shortages on the shelves and the higher price tag for such
staples as bread (grains), eggs, and dairy.
These prices are rising because demand is high but supply is low;
shortages in fertilizer and cost increases for shipping and harvesting are
eating into the profits of farmers; gasoline needed to transport the goods,
labor costs, and production expenses are going up; drought and other climate
issues are becoming more severe; and, lastly, the disproportionate “cost” to
the poor and indigent is widening so much so that hunger, migration, and
starvation are pervasive and persistent.
All this while the global economy is
rising and recovering from a massive body blow, Covid19! It is unimaginable what the price of
foodstuffs might be in a global recession…
As energy prices rise there is an
effect upon when/if you purchase a new vehicle, how much you pay for petroleum
based plastics, and how expensive distribution will be. In today’s marketplace it is becoming too
costly to produce oil and gas, so many of the major suppliers have put
extraction and exploration on hold.
Recall, too, that the Covid pandemic metaphorically…if not actually...shut
down the world for two years. No
vacations, no theatre, no extraneous household purchases. Throw in the Ukraine war, and global
sanctions on Russian oil, and you have the fundamental elements for a moral
consensus that leads to an economic crisis.
As supplies and supply chains
bottleneck…from China, Taiwan, and Russia...there are fewer products being
chased by more people, the classic definition of inflation. Thus, when central banks around the globe
begin to “tighten” money (raise interest rates) to quell pricing pressures the stock
markets react with a knee jerk response to sell. “The sky is falling, get out of the way.” Further,
when media spin tries to rationalize the panic, cognitive dissonance sets in. Those whose predilection is for pessimism
sell, those who are optimistic take a wait and see approach. This is where discipline, methodology, and
patience reward the educated investor.
Stepping back from the headlines and emotion matters if you want a
consistently good outcome for your portfolio.
Disavowing fear and panic is the role of a good money manager. In no way do we wish to ignore the
dramatically devastating effects of inflation and portfolio devaluations as a
result of market tumult upon household and corporate bottom lines. Rather, as analysts and scientists we feel
duty-bound to acknowledge that cycles do exist, and that the munificence of the
last decade was inevitably going to recede…as all cycles do. Thus, the task of sector and asset
rebalancing becomes all the more important and a part of the job of navigating
through a fluid process.
The markets and the economy might
appear to be congruent at this juncture, but real life tells us just the
opposite. One cannot “time” the market,
nor should one go from being aggressive to conservative, then back again. That is foolish, in markets, investing,
life…and golf, I might add!! Patience is
a virtue. In fact, our accounts have
sequestered sufficient liquidity on the sidelines prior to and during the
capitulation that I would be looking to buy at the right juncture, not
sell. Liquidity (cash) is not a default
investment decision…it is an active one. Asset
allocation is not just a euphemism for diversification. It is a quantitative representation of the
amount of risk in the market relative to a client’s stated objectives and
tolerances. Pragmatically speaking, it
is a meticulous interpretation of upside potential, and our optimism
that headlines do not rule the landscape, facts do. Right now, all signs point to capital gains
potential during the next phase of the markets in areas such as healthcare,
biotech, infrastructure, alternative energy, ecology, and agriculture.
No comments:
Post a Comment