Dealer’s Choice
Anyone who invests knows, or should
know, that up precedes down and down
precedes up. Volatility is a part of
the game and must be embraced.
Quantitative scientists measure the magnitude and duration of cycle
phases from which are derived predictions about the future course of
events. Bemoaning the condition of the
financial markets or the economy is uninspiring rhetoric because whichever
cycle we’re in is merely precedent for whichever one follows.
That’s not to say that human nature
must be ignored simply by wishing it isn’t there. Losing is real, as is winning, and nobody
likes to lose. But it is mostly a matter
of choice, and facts, about how one choses to assess the current state of
affairs and adapts to it. In financial
matters that job falls to money managers to allocate funds according to risk
tolerances, time horizon, and expectations about the future.
The current debate revolves around
whether or not we are in a recession; whether the financial markets are
entering a bear phase; and whether or not we perceive opportunity or disaster is
in the offing. Above and beyond essential
evaluation of the objective data, there are those for whom those answers derive
from a personality predisposition. If a
black cloud follows you always then things look bleak. Overly optimistic investors tend to see the
bright side. As a client fiduciary (a
term one hears on television a lot lately) I am always aware of the pitfalls embodied
in the data, but optimistic about finding solutions to my client’s
objectives. That is what asset
allocation is all about. As carpenters
say, “measure twice, cut once”.
Undaunted
As quarterly earnings season got
underway last week it appeared from the diverse sample size that we are not in
a particularly precarious position, rather a relentless one. The pace of economic acceleration was abating from that
which occurred immediately following the worst pandemic in a century. The market jitters and gyrations in recent
weeks were sourced by uncertainty concerning rate of decline in earnings,
not the earnings themselves.
Recall that we were all encouraged to
spend our way out of our despair by bankers and politicians who kept interest
rates artificially low and who passed legislation extending benefits and
offering cash incentives. Today, the
tide has turned….at least for the bankers who are progressively increasing
interest rates as a means to stem unyielding spending and to quell inflation anxieties. If, indeed, the past is prologue, then we
know that when this phase is over we will reach an inflection point from which
the next growth cycle will emanate.
Our current baseline assumptions are
that modest increases in employment, marginal slowdown in demand, post-Covid
supply chain shortages, and higher interest rates will narrow profit margins
(earnings) in the near term, making stocks significantly less attractive for
risk reluctant investors. Similarly, we see opportunity in short term
bonds as a means of enhancing portfolio total return. We want our portfolios to be “balanced”, but
as risk averse as possible. Expected slowdowns
in the economy will probably be perceived as negatives to overall confidence readings…a
cycle of pessimism that feeds upon itself.
Right now, micro is more important than macro for most investors.
We are holding a healthy level of
cash in our portfolios as a buffer against daily volatility. While portfolio valuation declines are never
acceptable they must be tolerated until the end of this upheaval is
completed. However, there are, and will
continue to be, opportunities for capital gains in socially responsible
investments (SRI) such as agriculture, healthcare, alternative energy,
infrastructure, and transportation.
The pandemic was a once in a lifetime (negative) phenomenon. Its traces will be felt for generations. But if this is indeed our “down”, then there is hope that the next “up” will be even more handsomely rewarding.
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