Market Commentary for the week of December 4, 2023

“Where are my double-digit returns…?”

Stock market momentum derives from two sources: positive earnings acceleration  and expectations of continuing good economic news.  This is not to suggest that there aren’t innumerable other factors which contribute.  But, overall, these are what motivate corporations to build a better mousetrap.  Empirically, this year has been pretty good for the “averages”.  But why is there so little breadth, and why are investors constantly in a state of concern?

The domain of the financial markets is also divided into consumer affairs  and corporate concern……..in essence, Main Street versus Wall Street.  When these two elements are in sync, the sky’s the limit for capital gains potential.  When not, the dichotomy can lead to inertia, or worse.  Unfortunately, we are in one of those cycles of decoupling as we enter the home stretch of 2023.

Indeed, summertime valuations and expectations had risen so far and so fast that the attendant Autumn dismay was fundamentally predictable.  Of course, the extent of the capitulation within portfolios was highly dependent upon one’s allocation and risk tolerances.  We spent a large part of the early summer buying short-term time deposits, for example.  Long equity valuations now appear to be at “fair value” but our deployment of cash reserves bolstered total portfolio yield because interest rates were rising.  This strategy was not a matter of luck.  Rather, we had been sitting with sizeable cash reserves earlier in the Spring ready to invest as the Federal Reserve and other global central banks remained insistent upon quelling inflation by raising interest rates (the cost of borrowing money).  Thus, we were obliged to allocate into notes that enabled a compelling return and to rebalance our risk horizon towards a shorter time limit.  This strategy allowed us to weather any intermediate volatility wrought by the stock market.

We were wary of buying equities “on the way down” which, in this writer’s opinion, usually leads to unintended consequences.  Things are never as bad as they seem, but prudent and sufficient distribution by asset class mitigates the effects of overweighting one’s account unnecessarily.  Of all the ironies manifest this year, lack of discipline was not going to be our performance undoing.

Without question, we still see continuing positives woven throughout the economy.  But earnings theories are in a fundamental shift, moving more towards corporate belt-tightening.  Price pressures are having a negative effect on growth projections, employment, R&D, and inventory capacity.  These obstacles are not insurmountable.  We have had economic compressions in the past and rallied successfully thereafter.  Modernization and social changes….the internet being one example…. are forcing business (and citizens) to adapt to a new normal.  Change is not always an immediate  effect of something which precedes it.  Instead, there is often resistance.  The adaptation of “new norms” takes a long time to process.  When, where, and how these new paradigms materialize is the exciting part of our quantitative analytic methodology.  Our evaluation of these data is the foundation of our capital gains projections and asset allocation models.  The “long-term” looks good for Healthcare, Technology, Water and Agriculture, and Alt-Energy equities.

Sunrise

Relative valuations amongst asset classes are shifting the fastest today than in the last two decades. The changing global landscape is influenced by current events at home and abroad.  No one is immune from the impact of exogenous or unforeseen circumstances.  Learning how to save on expenses (live within one’s means), for example, is a universal personal and corporate imperative, as necessary in Des Moines as in Beijing.  Territorial sovereignty is becoming an antiquated antithesis to global integration.  Economics is truly becoming a borderless science. The impulse to “pull within” is the imprimatur of an older, post-war generation.  The burden now falls on today’s bankers, financiers, politicians, and ethicists to redefine and reengineer the sciences, as well as the laws of geopolitics and economics.  There are only so many “dollars” to go around that they must be deployed judiciously.

Today’s market is becoming about downsizing, cutting costs.  “Profit acceleration”  is all but an outdated oxymoron, particularly as today’s business is charged with creative accounting, managing expenses, and still being good stewards of the planet, concurrently.  Fixating upon the closing price of the Dow Jones each night is, in our view, a myopic way of investing, one which truly ignores the forest for the trees.

      

Market Commentary for the week of November 20, 2023

Cornucopia

As the world gets ready to celebrate the holiday season and the New Year it’s also significant to point out the disparities that exist when considering the distribution of natural “gifts” that exist on the planet.  The allocation of natural resources such as food, energy, raw materials, and the industrial capacity to utilize them is not always an equitable equation.

Water-related investing, in particular, is a compellingly misunderstood and under-reported phenomenon.  And yet, the danger of this commodity’s scarcity and/or depletion is one of the most significant headlines of our times.  Further, the investment opportunities related to water recovery, purification, and delivery might be the most impactful capital gains notion of this century.

For several decades, I have been deeply involved in this topic, and others, in the field of “sustainable” socially responsible investing (SRI).  Our Global Water Resources portfolio concept, for example, has a record of significant outperformance compared to its peers.  My research has concentrated upon safe provision of potable water, water treatment (desalinization), and the businesses that are devoted now and in the future to technology in service to these human needs.  Our recommended equity basket contains about 43 companies, various capitalizations, and multiple geographic locations.  Water related businesses run the gamut from Utilities, Consumer Discretionary, Technology, and Basic Materials.  The criteria for inclusion focuses on earnings, price, and relative strength.  The next few decades might represent our best investment alternative amongst the many in our portfolio. 

While pundits are foretelling a global crisis in water access, we believe the essence of the problem is most unique to specific geographic regions.  Comparing water withdrawal rates in various parts of the world, we note an uneven distribution of the problem, the most disturbing of which is in Africa and South America.  Those problems are directly related to poor infrastructure and ineffective government oversight.

In fact, the infrastructure situation is particularly vexing.  Most water systems worldwide were built in the last century and before.  While miles of canals and containment stations need rebuilding now, recent weather catastrophes have made the public painfully aware of the effects of climate change and a disastrous collapse of land and concrete which abut them.

Less is definitely not more

Because mankind depends upon water for survival and commerce there must be a greater sense of urgency to modernize the systems that protect retrieval and potability.

Nearly 80 percent of the planet is comprised of water but less than 1 percent is fresh water or easily accessible.  The remaining supplies are either frozen in (evaporating) oceans or contaminated by industrial and agricultural pollution.  The United Nations posits that only about 10 percent of that 1 percent is fresh product suitable for personal use.

The real problem is that demand has risen while standards have dropped.  Water consumption is multiplying as the population expands.  The need for drinking water could double in the next generation.  Who will step up to remediate the problem; which government, business, or charity will succeed at de-stressing the dual crises of poor quality and limited access?

Water is required to provide for the production of goods and services, as well as sufficient drinking quantities.  (Parenthetically, if countries do begin a transition to nuclear power plants as their abrupt choice for “alternatives”, then additional sources of water will be required as cooling agents).  It is increasingly clear that the future will require more of this precious gift, not less.  If your tap is full and your access is unabated, think about those who must do without when you sit for your celebratory gatherings this holiday season, and be grateful.

                                                                     Happy Thanksgiving

Market Commentary for the week of November 6, 2023

From peaks to valleys…and back again

There will always be ups and downs in the financial markets.  As with anything cyclical, there are evolutions that occur over time.  And time, after all, is the most significant variable in investing.  It is the “denominator” for all calculations.  It is also what accounts for trends, whether they be cultural, financial, or political.

Nobody can predict the future with absolute certainty.  But we can measure and “quantify” the variables that precede this moment in time  to try and extrapolate the probability of those variables, or others, from happening again.

Buying investments successfully is all about integrating time, price, and duration to make a reasonable hypothesis about the potential for capital appreciation.

Defining the intricacy of how “things” interact with other “things” is the essence of successful portfolio management.  It is not an exact science but rather the art of blending instinct with experience and raw data.

The “pundits” say…..

Given that, we are in an unusual confluence of factors in the world today.  There are few periods in history when the globe was awakening from a pandemic, regions of cultural conflict were erupting into violence, and the immediacy of hunger and poverty lay mere miles from innumerable borders.

It is true that basic human behaviors are eternal: the desire for security and opportunity; the protection of family and property; the need to work; spiritual passion.  These needs never extinguish.

Thus, we look at today’s market landscape as a sign that despite the turmoil and volatility things are as they should be.  Perhaps not as we would like, but cyclical, evolving, and identifiable nonetheless.

For example, there is quite a bit of consternation about interest rates and consumer prices.  As these two data points intersect and parallel rise upwards, our government and central banks try their best to arrest the trends.  But I would argue that higher prices and high interest rates are a fleetingly cyclical manifestation of positive  economic developments stemming from a two year lockdown on commerce due to Covid 19.  While the pendulum of these events might currently be skewed too much in the extreme, one can view the opportunity to benefit from these integers as historic and proportional.  When was the last time you could “park” cash at a 5% return?  A slower economy never offered you that chance.

Inflation, too, is impactful for commodity prices and certain equities.  When pricing power was limited….only a decade ago…leveraging assets was impossible.  Although we acknowledge a spiral of price gouging, this too is an opportunity for corporations to collect returns on stagnant profits that nearly shut many of them down during the pandemic.  High unemployment and devastating profit decline brought about a fear in the financial markets over the last two years during which many portfolios suffered.  Once again, the element of time  lends us perspective about what we think we are seeing versus what is actually happening.  One must be able to see the forest from the trees.

Today we continue to advise clients that allocations are an evolving thing but the objective remains constant: invest in unwavering refrains and companies that benefit the greater needs of the human condition: food and water, energy, shelter and infrastructure, education, technology, healthcare.  And because of that advice our track record over the decades is second to none in securely managing the wealth of corporations, the affluent, and institutions.

Let the traders roll the dice, we prefer to take “crash” out of our vernacular.

Market Commentary for the week of October 16, 2023

You break it, you own it

In a universe of high-yielding fixed income and rising interest rates the risks have seemingly grown for stocks.  As many have observed, the end of the third quarter was not very kind to portfolio valuations.  However, we do know this: corrections and panics are a part of investing and usually present incredible opportunity to step in and capitalize when markets trough.  Though the selling might continue into the next few weeks markets always present a “quantitative bottom” from which the next up-leg derives.

Managing the downside of cyclical events is crucial in moving portfolios forward, from point A to point B.  Letting winners run until attaining stochastic exhaustion while trying to hold losses to a minimum is the essence of good stewardship.

We can’t yet know the tally of costs associated with war between Israel and its neighbors. The conflict in the Middle East is likely to affect global markets negatively, especially oil stocks.  There is only so much product to extract and, unfortunately, a large percentage of global reserves are located in that territory.  When regional conflict erupts it opens the floodgates for worry and concern about supply and distribution elsewhere.  But this “supply and demand” conundrum is not unique to oil.  Covid showed us that medical equipment and pharmaceuticals, water and food, housing and security can also be quickly held hostage by territorial disputes, government inaction, and climate change.  Rather than demonizing these sectors and our circumstance, savvy investors can find potential capital gains opportunity from longer-term issues that persist beyond current events and provincial conflict.

It is difficult as a growth investor to espouse that “bottom-fishing” is an effective tool.  But widening our aperture shows us that parabolic trendlines always have peaks and valleys; that there will be recoveries that follow capitulations.  It is during those recoveries that price momentum can be quantified as to probable duration and magnitude before the next apex.  

When markets fall below their “moving average” there is an opportunity to recalibrate sector weightings as well as specific equity selections.  Our current fourth quarter list of recommended candidates seems to favor defensive categories and overwhelmingly negative/neutral confidence.  Our weightings going forward should favor Basic Materials and Utilities while underweighting Consumer Cyclicals and Industrials.

Manage the risk

There is no question that the events in the Middle East will weigh heavily over the global body politic for the foreseeable future.  We also note that global central bank’s monetary policies have been a boon to investors seeking an alternative, safe-haven from the volatility in the equity markets.  We expect to capitalize upon these inefficiencies by continuing our pattern of adding short-term time deposits (CD’s, Treasuries, commercial paper) as a substitute for ambitious gambling in the stock market.

Our perception of risks has expanded since last Saturday’s attacks.  We cannot change vectors overnight but, clearly, there will be an economic (if not political or military) reckoning to be had.  Therefore, it makes sense to look at pivot points in the economy that are consistent with our quantitative discipline, beginning with macro, earnings, and price momentum.

Market Commentary for the week of October 1, 2023

Pave Paradise

A unique confluence of factors is emerging as Wall Street appears to be ending one of its most durable rallies in recent memory: businesses and politicians are unwittingly conspiring to reengineer the process by which “success” is measured for themselves and the “average” investor.  While no one who owns stocks had been complaining during the massive run-up in valuations, there are enough concerns now about how wealth is staggered throughout the economy, and just who, really, is the beneficiary of wealth-building after the Covid pandemic.

Without question, the gap between rich and poor around the globe is a death struggle for some against famine, security, and climate. 

Too many in the emerging nations still suffer from empty coffers and barren water wells.  The process of providing for the common good is sometimes synthesized by politicians into a struggle to maintain power at all costs.  The nature of politics has transformed from noble altruism into moral degradation. 

Markets

As with anything in the capital markets, the issues usually are defined by profitability and costs.  The other line items of corporate accounting rely upon conscience, vision, motivation, and leadership.  For example, most agricultural businesses know the science of splicing genes, warding off insect diseases, managing water flows, and the like.  Advances in genomics allow these companies to hone in on desired traits and characteristics that yield the highest crop potentials…saving time, and resources, in the process.  These are benchmark achievements of our generation.

The problem is that the motivation to share these resources with a broad swath of the public requires money that the monopolies don’t seem eager to spend.  Inspired by this new post-pandemic capitalism, companies keep themselves ready for the next catastrophe by hoarding cash and building profits until the next lag in earnings hits.  In the meantime, spiking food prices, scarcities, and uncivil discourse have relegated the less fortunate into perpetual desperation.  The staples of a good life, including housing, education, healthcare, and food are taken for granted by those who have them, coveted by those without.  A recent spate of global labor strikes bears witness to the dichotomy between the haves and have-nots.

The pandemic also laid bare the plight of global supply chains by disrupting distribution channels.  In a world where billions of people rely upon the seas, the air, and land transportation for the basics of life, more people are going hungry and without those things than ever before.  Science and politics might have the “answers” to all of life’s hardships, but even the experts must sit by idly while institutions diddle around trying to diagnose the issues, offering up excuses and rhetoric to appease their jingoistic base.

We know, for example, that climate change has become a defining factor now influencing many of these social issues.  In a warming world, the risk of dislocation, poverty, and famine has unfortunately become a new normal.  While rising temperatures might actually raise crop output in some regions, the demand for water and fertile land is also increasing as the population soars.  Scientists tell us that as temperatures rise the net crop retrieval rate per square acre of farmland will drop because of insufficient water capabilities.  In drier areas of the globe where water for irrigation is more scarce, farming as a way of life is perishing.  Hurricane ravaged regions might say they are inundated by water; drought stricken areas say just the opposite.

What Wall Street needs to heed, both anecdotally and analytically, is that conventional ways of doing business will not suffice in this ever changing pattern.  However, the corporate sector and politics are decades behind in addressing the needs of our time. As we reevaluate the landscape in a post pandemic world we are discovering that more of our fellow citizens are malnourished, both in body and spirit.  “Deep pockets” is not an excuse for moral vapidness.  “Not my problem”  is, in fact, your problem.

Strategy

Wall Street should be warming to the concept of using innovation and technology to “do good” as well as creating long-term profitability.  It is possible to expand the value of your 401-k while investing responsibly, consistent with a values-based standard.  A company that feeds the poor utilizing better science, or which increases clean energy production, or which builds affordable housing, or which delivers education and technology to rural populations can also have a rising share price.  Whether or not you, too, would own one of these companies that abides by a sustainable mission also speaks volumes about your investment methodologies, objectives, and empathy.

Good stewardship of our planet, fair governance and compliance, and profitability from innovation and strong demand  are themes that will resonate with a higher percentage of the public these days.  Not everything is a zero-sum game.  “I win, you lose” is, itself, a counterproductive financial objective.  Generating earnings does not, by definition, have to come with a prohibitive cost.  In fact, I would argue that not  to do these things impedes social progress….and might cost your portfolio bottom-line extraordinary gains from a lack of exposure to new science. 

Lest the reader thinks that we are espousing a “Pollyanna” view of the world, let him be reminded that roads are agnostic, schools are agnostic; hospitals are agnostic; food is agnostic; energy is agnostic.  The point is that no special interest or specific trend is exclusive to one group.  Walk a mile in someone else’s shoes and you’ll understand the lyric from (with apologies to my much younger contemporaries) Joni Mitchell….”you don’t know what you’ve got ‘til it’s gone…”    As quantitative analysts we refer to quotients whose comprehensive scores result in the highest probabilities of capital gains for our client’s accounts, and which lead to continuous, intergenerational wealth building and earnings creation.  Our fourth quarter research leads us to conclude that a substantial portion of this market’s “run” is completed and that investors are starting to reign in their enthusiasm.  Further, there is a perceptible shift towards natural resources, tangible assets, and defensive sectors.  Although we are about to enter the holiday buying season, it appears as if higher interest rates, supply chain impasses, and waning confidence could negatively impact the retail sector in their efforts to build year-end earnings acceleration.

Therefore, one must always take into account the imprecise nature of exogenous events and political discourse that advances a divisive narrative.  As mentioned in the first paragraph, all sorts of dissonant factors have changed the playing field inexorably…or so it seems.  Government inertia, lack of willpower, and consumer uncertainty about the sustainability of the global recovery have thrown obstacles into this year’s push toward ubiquitous resurgence.  And it’s not a certainty that that hangover of apathy won’t linger for several more months.  The magnitude of disruption caused by Covid has had both a psychological and financial effect upon the duration and magnitude of the recovery.

Conclusion

Our strategy is to manage aggressively against disruption and to diversify into a more moderate framework for the balance of the year.  We have always warned against “linear spikes” that developed during the rebound, and unfortunately those spikes, and their capitulations, have occurred.  We have no reason to doubt that additional surprises won’t happen.

If yields continue to rise we would expect a concomitant decrease in earnings acceleration rates in equities.  Interestingly, though, a rise in rates sets up a more durable alternative investment scenario for the average investor looking to diversify into short term instruments for protection against stock volatility.  But be forewarned: volatility is a part of investing and cannot be ignored.

These various headwinds discussed herein, and others, pose larger questions for investors as they prepare to close out a very turbulent year.  Traditional “large market” opportunity has been supplanted by venture capital and emerging technologies.  Tighter money has put limitations on unnecessary and exorbitant borrowing.  It is time to acknowledge that yield-based and defensive sector investing offers consistency and protection from volatility and portfolio drawdown.

As we undertake a comprehensive effort to restructure and rebalance portfolio risk we must remind our readers that quantitative, integers-based modeling with a strong bias towards earnings acceleration pattens has historically proven for us to be our way of mitigating against the vagaries of style, emotion, and conjecture.  Our work over the years in “silo specific” portfolio creation has built an amalgam of successes irrespective of capitalization valuation all related to creating capital appreciation in areas that provide investment stability……..notably, healthcare, technology, basic materials, infrastructure, education, energy, and agriculture.  We have demonstrated over the decades that it is possible to allocate a reasonable portion of monies into socially responsible themes while still creating financial gain without sacrificing methodology or performance.

Suggested balanced account asset allocation, Q4, 2023

Equity:                53%
Fixed Income:    39%
Cash:                    8%

Market Commentary for the week of September 18, 2023

Shifting sands

Buffeted by expectations about a year end tumble in stock prices, the market settled into a pattern of fits and starts last week, forewarning a rocky close to the third quarter.  Although the data about inflation is abating somewhat, the severity of the response to consumer anxieties is what might derail the markets in the next few months.

Even as the markets were expanding during the Summer there was always an uneasiness about whether or not the fundamentals were “for real”.  Nevertheless, investors buckled in and went along for the ride.  As the saying goes, “you can’t win it if you’re not in it!”   The real questions about durability and sustainability are, for now, held in abeyance.

It is obvious, however, that there is a real struggle between the expectations of profit growth versus the economic impact of inflation upon spending and profitability.  The most modest interpretation would have you believe that a soft landing is inevitable, that the Fed knows what it is doing, and that profitability is “rotating” by sector.  Even as deficits expand, demand wanes, and GDP decelerates, the Dow Jones averages expand.  Our research indicates that these successes are restricted to a very small universe of companies….and participating investors.  The rest of the world is consumed by politics, population migration, hunger and poverty, and security issues.  In other words, talk of a “rally” in the markets affects only a handful (on a relative basis) of extraordinarily wealthy…..and a few speculators looking to become so.  This might not be the “rally of all rallies”, but instead a ghoulish game being played only in monied circles.

We would feel more comfortable calling this a global recovery if everyone  were the beneficiaries of an expanding pool of assets.

Location, location…..

Interestingly, the Western economies still stand as a bastion of technological innovation and hope for the rest of the world, even though their influence is sometimes in dispute by the East.  A far greater percentage of the world’s wealth resides in the West where demand, consumption, and currency drive momentum in business.  One must note, though, that traditional investments are seeking cheaper alternatives in communications satellites, pharmaceutical research, and alternative energy resources that are found in the developing nations.  Globalization and integration of business function is still the calling card of a sustainable recovery and rebound. 

We have also written in the past that a period of lower interest rates made stocks the “default” investment of choice.  As rates have risen during the last two years short term fixed income instruments have gained in popularity…and security….for many investors.  Having played its hand, the Federal Reserve unleashed a new wave of savings and investing that has benefitted those who were frightened by the volatility of the equities markets.  Thus, the mania and concern that might manifest during the fourth quarter might be dulled somewhat by the fact that the universe of participants in stocks is at significantly lower levels than a year ago.

For our part, we are using the month-end inflection point as an opportunity to rebalance and refocus upon our macro analyses.  It is better to be prepared for the long-term than to obsess about the news headlines each day.  We do not, in fact, see a diminution in the enthusiasm for stocks, but rather a reallocation into those sectors that have a more enduring story to tell.  While the post-pandemic rallies were about pent-up mania, the rest of this term looks more to be about projecting winners and losers in the global marketplace.  This might temper the appetite for “trading” in the market, but it might also quell many anxieties about the volatility (and loss of principal) that attends as a result.

Nothing says sustainability like strong earnings.  In this climate of uncertainty, pricing power and strong consumer demand should be your guide as to where to invest your money.  Whether that means defensiveness or aggression, the goal is to move portfolio valuations from point A to point B with as little disruption as possible.   

Market Commentary for the week of August 28, 2023

 Recalibrate redux

After this most recent round of earnings reports, the market’s short-term algorithms took on a decidedly riskier tone.  Downgrades and pivotal price shifts in stocks moved the averages lower, breaking a string of momentum that had been developing all Summer.  Thus, it will take time to reestablish price supports and upside trend vectors.  No doubt, recent earnings have disappointed….something we predicted in earlier missives.

And still, inflation concerns permeate households and executive boardrooms.  A surge in borrowing during the last few years, spurred on by lower interest rates, is finally coming home to roost.  There is simply not enough appetite for more borrowing while rates reside at their high point.  Meanwhile, the average cost for goods and services has increased by multiples of 10.  A tapped out consumer is no good to anyone and obviously presents the biggest obstacle to corporate earnings increases.  The ripple effects of these constraints is something we are monitoring closely in all asset classes.

Higher inflation also means more rate hike proposals from the Federal Reserve.  While net family incomes are declining the problem spills over into the economy writ large.  Too many people have mistakenly thought that the economy grows in a straight line, whereas most of my clients understand that we occupy a parabolic universe, not linear.  One needs to know on which side of the parabola their investments reside and do all that is possible to mitigate drawdown and volatility caused by a downward slide.  Managing risk is the ultimate task of any money manager.

Preserving one’s mental security is equally as important as preserving portfolio sanctuary.

Not withstanding the risks detailed above, we remain confident about our long-term projections about sustainable, socially responsible investment solutions.  A global migrant crisis involves innovation in housing, security, and food distribution; climate catastrophes necessitate strategic energy alternatives and disaster/shelter relief; poverty and food insecurity requires agricultural and educational policies to meet structural disequilibrium.  Here is where the venture capitalists can ride in like white knights to solve problems that are societally beneficial.

Acknowledging how best to address geopolitical tensions is what our government is for.  Where, when, and how to pivot is the over-arching demand of our leaders.  As asset managers, we respond to, and try to predict, the vectors and contrasts that we can measure in order to protect our clients from volatility and exogenous noise that can influence both their short and long-term goals.  But, clearly, ours is a reactive profession in a world where we are asked constantly to make predictions about the future.

With yields having risen in each of the last two years many are asking whether the increases are permanent or just a temporary measure to fight inflation.  Interestingly, even during the last decades of accommodative monetary policy, there wasn’t the kind of positive economic response that we’ve seen with higher rates.  No doubt that some of the GDP increases are in direct response to the Covid lockdowns and pent-up demand.  More specifically though, higher rates have, in our opinion, created a favorable alternative investment scenario for investors that enables them to buy stocks and short term saving certificates, both, which enhances their savings and speculative opportunities combined.  A modest rebound in inflation has proven to be the proper stimulus to a moribund economy that previously had relied upon the equities market for capital appreciation and portfolio growth.

If inflation remains “moderate” through the end of this year we believe there is ample capital in reserve to support a productive cycle of investment with competitive rates of return.

Market Commentary for the week of July 17, 2023

Standardized or Transformative?

Among the many lessons confirmed in a post-pandemic world is that change is inevitable.  Throughout history, adapting to a transforming world is a constant.  How one deals with transformation, how one feels  about transformation, is unfortunately also a part of our evolution.

As the markets deal with a rearranging landscape, and a rebalancing of sector leadership, it has gone through two distinct phases since 2020: (1) fighting to hold on to standardized norms and (2) quickly adapting to a new world order.  Indeed, the future of investing is now a function of our ability continuously to respond to the variance and magnitude of these shifts.  Whereas there is an element of “artistry” to that endeavor, we still must understand how the integers align and how to create a new science from what we once assumed to be so.

The biggest macro adaptation I see is that the global pandemic reinforced the notion of “one world” interconnected.  Although practices and policies of individual nations is significant, no matter the country of origin, diversity and cooperation is the hallmark of an even flow of commerce.

Therefore, sometimes being uncomfortable is a valuable tool in how to get from one place to another when seeking solutions to global inefficiencies.  It might mean that one group or another feels “left behind” at any moment in time, but it also leads to innovation and advance.

As an example, the global workforce was nearly decimated during the pandemic because of shutdowns and quarantine concerns.  However, we saw how efficiently technologies and local small businesses modified the landscape to relieve the distress in our communities.  In some instances, the “disenfranchised” became the heroes in their own story….the underbody of the economy rose up to save the majority.  The most powerful surge in employment came not from the large corporations but in the pioneering small business community that kept local goods and services thriving.  Each time that there has been disruption in the system, the bottom-up finds the capacity to rebuild and bounce back.

Secondly, there has been a disproportionate obsession about inflation and about how our politicians and central bankers “should be” addressing it.  Let’s be clear, inflation is an insidious tax upon the purchaser.  But its occurrence is normal.  In our uniquely particular times the backlog in supply and the buildup of demand exacerbated by the pandemic caused prices to skyrocket….no doubt too abruptly.  But I would be willing to wager that for those of a certain age your first Chevrolet cost less than $30,000; your first Callaway driver cost less than $175; your first home cost less than $100,000; and your first McDonald’s cheeseburger cost less than $1.00.  In other words, obsessing over cyclical inflation might be an exercise in futility.  Accept that higher costs over one’s lifetime, and higher interest rates, are the prices paid for doing business in an expanding economy.  Already, the skyrocketing inflation data is beginning to abate.  Our research efforts to quantify these whirlwind pressure shifts in the economy most likely will help us understand when to expect volatility in the financial markets’ secular cycles.

 So, are we in a new paradigm period (how many times have we heard that phrase uttered in the last 30 years)?  Is this truly a different set of circumstances?  We can’t know that now….perhaps only in hindsight.  But we do know that just in the last two generations education and technology have taken us to outstanding breakthroughs.  Recall, there was no internet when I started my career on Wall Street over four decades ago!  I used to trek on up to the public library during my lunch hours to do research.

Change is ephemeral.  Societies must learn to cope, adapt, learn, and feel a sense of comfort with skills demanded of them as history unfolds.  The capital markets play their part by providing funding sources for new technologies.  The “Street” must also respond by making these technologies affordable and available to a broader spectrum of the public.  Food, healthcare, infrastructure, climate, water, and energy are sectors that we see as capable of having that kind of thrust which brings transformation to a modern society.  More and more, socially responsible themes are becoming part of the political and economic lexicon, and the world is finally beginning to acknowledge their relevance, both to social good and to profit delivery.

The pandemic and its after-effects were felt by everyone, irrespective of age, region, or social status or hierarchy.  Thus, the possibility of moving “off center”, to feel that sense of discomfort, is also a current pandemic-sized issue.  There will be winners and losers in this battle, but the incentives for success require investors to strap in and seek opportunity from the rubble.

Market Commentary for the week of July 1, 2023

The Other Side of the Coin

It is always during periods of maximum uncertainty and stress that investors lose their perspective about creating opportunity from the financial markets.  Now, however, should not be that time.  Rather, history has us poised at a remarkable inflection.

The global economy, although disjointed, is emerging from one of the most horrific health crises of modern time.  Downside risk intensified during the pandemic; it is abating now.  If the last three years taught us anything it is that cyclic phases are real and that the depths of the pain of a recession are not equally spread.  Apparently, there are wellsprings of inexhaustible capital concerning just about any problem if the willpower is there to support it.  No doubt, confidence is always a fragile element of the equation, but the more intense focus should always be on the future, not the past.

By fixating upon the hardships just endured, it is easy to become traumatized and inert as a result.  No doubt, the disease was real and many of us lost a friend or a business because of it.  Pain is slow to recede.  It will probably last for a while.  But from out of those disruptions emerges extraordinary exceptions that will influence our fiscal and emotional recovery.

In every crisis there is a moment of deleveraging, when we feel as though the pain will never end.  But the sun comes up the next day, the skies literally and figuratively brighten.  Markets awaken to the fact that this critical moment is our best chance to turn things…all things…around.  It was not just our portfolios that needed loving care, but our entire value system.  Fretting about the enormity of our problems is not the same as sitting down and mapping out a strategy for the future.

 Markets

Not unlike other market reversals in recent memory (2008, 2002, 1986) the opportunities this time were hidden from plain sight but stunning nonetheless.  New advances in pharmaceutical research led to the creation of a vaccine in record time.  Restructured workplaces enabled commerce and communication to continue.  The financial markets reengineered their technologies to allow a smooth transition of capital in the wake of panic selling and buying.

The similarities to the past don’t end there.  Global technology initiatives permitted the flow of goods and services despite supply chain issues and delivery backups.  Was everything done perfectly?  Of course not.  Nor was it “equitable and fair” in every instance.  But aggressive responses amplified the intent to move ahead of the stagnation and instructed us in how to move boldly when fear gripped the system.

To its credit, Wall Street and the global banking system were leaders in bringing stability to a fractured world.

After the initial panic and decline, there were more mini-crises to deal with.  Our worst fears about education gaps, government accountability, spiritual listlessness, and crime in our streets happened.  No one individual or institution had all the answers to quell those concerns.  But commerce and industry had a mission: to maintain profitability and capital flow for its stakeholders and customers.  The depth of the medical and financial disaster beckoned them to respond aggressively.  They succeeded.

The pandemic wrought so many permanent changes and outcomes to our social construct.  Perhaps so, but it also brought a stunning response: record employment across all demographics; global commercial supply chain integration; financial markets having one of their best rebounds in history.  The economic maladies we are witnessing today, despite their inequities, are far less severe than they were preceding the pandemic.  Markets are trying very hard to recover a sense of perspective and purpose.

We would argue that we are better prepared to deal with the next crisis because of the lessons learned during this one.  What makes catastrophes so devastating is the failure to plan for them before they occur.  Discipline….in life and in investing…is about problem solving and knowing how to attack the next step.

Investors who bought financial assets when they were cheapest reasoned that although global financial conditions were awful at the time, opportunity was present.  In this case, reasonable fundamentals were “artificially” contravened by the Covid pandemic, yet never wounded.  The headlines might have been dire, but this crisis…like others before….offered the chance for redemption and recovery.  The sickness was curable; so, too, the economy.

Although the empirical data provides little conclusive proof that the recovery is ubiquitous, it is not hard to recognize fundamental shifts which might hasten particular sector expansion.  To wit: inflation is receding, not expanding; consumer savings rates are expanding with the increase in short term fixed income banking products; earnings are proliferating in the industrial and consumer stocks; employment (which is as close a “leading” indicator as one might want) is stable; and tangible assets are still increasing in value without busting the budget of most purchasers.

Our work indicates that most data sets are improving, but undeniably different.  Inflation is not the scourge once thought; bonds and stocks are not the enemy of wealth building; the pandemic is receding; and, as noted, commerce is not collapsing.  And yet, it is still hard to erase the thought that just below the surface the potential for another crisis is looming.  Despite all the breakthroughs, policies, and incentives of the last three years, consumers psyches are still raw and fatigued.

There is no blueprint to which we can refer that definitively gets us out of our morass.  As noted, discipline and grit are only part of the solution.  Trying to divine the Bulls from the Bears has become so insignificant in the grand scheme of things related to life and death issues.  But we should also remind ourselves of the micro details in order to assuage our fears about the macro.  Let’s not forget that the last year and one half has been a banner period in the financial bourses.  The market collapse that was widely speculated never materialized.

Given the tremendous panic instinct to sell, it is remarkable that common sense won.  We would not be surprised to see that confidence continue.

Conclusion

Although it is becoming increasingly harder to tell the winners from the losers just by anecdotal evidence, every market offers clues about specific sector leadership.  These clues help you to sift through the “noise” of politics and economic assumption to find real, quantifiable patterns of opportunity irrespective of geography, capitalization, or currency.  These data also help dispel the notion that gloom supersedes hope when trying to climb out of an emotional hole.

Therefore, contrary to media hype, we believe we are more so building a base in the market than we are setting the stage for another capitulation downwards.  Our relative strength indicators in the agriculture, financial, industrial, and consumer sectors strengthen our resolve that profits, and social good, can be mined in the next few months.  Many observers are underestimating how successful the Fed and other global central banks have been at manipulating a “soft landing”.  They miss the fact that lower inflation (not the absence of inflation) really does increase spending and give consumers stronger buying power.  This is the hidden gem in the midst of all the market’s worries. 

With the global economy gasping for air (liquidity) and inflation being held at bay, we can see both the bond and  stock markets closer to an enduring rally than we’ve been in years.  In particular, we favor a narrative that focuses upon tangible assets as the (literal) building blocks for the economy: steel, paper, wood, iron, and chemicals.  We also maintain our bias towards “socially responsible” themes such as food, water, housing, security, and healthcare.  But, overall, we stress that the bigger picture supports a cyclically positive…not catastrophic…summary.

 

Suggested Balanced Account Asset Allocation, Q3, 2023

Equities:              55%

Fixed Income:    38%

Cash:                      7%

 

  

 

 

 

 

 

 

 

 

Market Commentary for the week of June19, 2023

One for me, one for you.  Two for me, one for you….

As we approach the second half of 2023, the one constant from this previous weeks’ activity has been a recurring market volatility in psychology and numerals owing to an agonizingly painful wait to hear from the Federal Reserve about their interest rate plans for the future.  Unfortunately, these decisions favor neither the bulls nor the bears.  And yet, it is remarkable that the averages continue to inch above resistance considering so many of the distractions and impediments placed in their way.

How, for example, could one have predicted that stocks would be making new highs when the cost of money (interest rates) is so onerous that both producers and consumers must think twice before committing to borrowing capital?  How, too, to account for a resurgence in the fixed income markets like none since the mid-1980’s, especially when the mood is sanguine and the condition for many is paycheck to paycheck.

And how to reconcile an ever widening gap between the wealthy and the not-so, across all global regions?

Last week was an excellent example of the fine line between success and failure in the world of commerce: earnings reports so disparate that it becomes particularly obvious that the winners are thriving while the losers are on the verge of closing up shop.  Those with the lion’s share of the profits are catching all the breaks (and capital) while weaker sectors are struggling to stay above water.  It is not lost on this observer, however, that the wealth gap is widening, and quietly usurping the economic influence of a large segment of the marketplace.  For now, whatever panic festers about these inequities is being underreported and held at bay because the underlying fundamentals are quite favorable.  Nevertheless, we see an almost imperceptible shift in norms, mores, and values within the fabric of the markets after the devastation caused by the pandemic.

The issue is whether the recovery, bumps and bruises all, can reach a sustainable velocity for all   industry groups.  While measuring cycles is obviously the centerpiece of our quantitative analytics, most sector weightings in our portfolios are heavily skewed in one direction: the narratives and themes of essential industries and companies with outstanding earnings metrics.  It is not the cyclical phases themselves that are giving us trouble, but rather the secular (long term) overview that we see as having most been affected by the Covid catastrophe.  A lack of clarity about the future is always destructive to consumer confidence and their future actions.  Nevertheless, the trends are rising and we expect to be net buyers of equities in the pivotal next few months.

Even as bonds are diffusing some of the anxieties about investing there is compelling reason to believe that we are near the end of the high water mark in interest rates.  Yields have risen nearly five hundred percent above their historic lows (2020) and taken on the same linear configuration as that which we disdained in equities during the last 5 years.  Linearity always reverts back to the mean and usually catches the uninitiated off guard.  The Federal Reserve seemed to recognize that fact in softening their rhetoric last Wednesday.

Although central bankers have firmly argued for anti-inflation measures that justify their policies, bonds’ relative value to stocks has absorbed too much of the conversation.  Hopefully we might reach an equilibrium point where yields abate and comprehensive sector fundamentals provide more strongly to any capital gains potential for equities.

Markets are cyclical…we stated that above and always assume that point as quantitative scientists.  When cycles are artificially interrupted or manipulated there ensues a mathematically (and psychologically) disproportionate consequence to the playing field.  Look, we get it.  Everyone wants to win the race.  But when issues of fairness and balance are suspended in a frenzied rush to ameliorate one problem for another problem then an unequal predicate is introduced into the calculation.

The book is still open regarding whether this past week represents a turning point in our perceptions, direction, velocity, and stability.

Market Commentary for the week of May 30, 2023

Is everyman really  an island?

A funny thing happened on the way to restoration following the pandemic.  Economists and the general public conflated plump profits and rising sales with the notion that “recovery” was being felt by everyone.  Never mind the “average guy” who really could care less about output, yield, or profits…..those people were just trying to survive until the next day because of rising food costs, gasoline prices, and supply shortages.  While no one was complaining about portfolio increases during the rebound, there were enough stragglers left behind that we should take notice.

And nowhere does the wealth gap seem more excessive than in matters of life and death, such as healthcare, food and water, and security.

Large segments of the global population have empty larders, either because of political strife, war, or climate.  The painstaking process of finding solutions for those disaffected is a complex web of geopolitical will and moral courage.

As with anything regarding finance, the issues are usually defined by expenses (cost) and profitability.   The other part of the equation is simply a matter of worthy conscience and motivation.  Thus, if the answer is known but the cost is prohibitive then there is very little motivation to waste time or money on behalf of your stakeholders.

Eliminating tardiness to the finish line is the hallmark of people who get things done.

The problem is that not all nations have equal access to the resources necessary to procure technology and brainpower to create these solutions.  Certainly, Western nations have those funds, have the infrastructure, have the scientists and economists.  In a world where the vastly underdeveloped peoples are hungry, thirsty, and impoverished their voices unfortunately are not heard, or ignored altogether, by the rest of the world.

Wall Street has been very late in acknowledging its capacity and responsibility for innovation simply to “do good”.  Their thought process has been to try and commoditize product offerings in fancy packages with glossy commercials to drive profit and return to the investor, and themselves….not because of altruism or what’s good for the planet.  Yet, it is possible to do both …to enlarge the value of portfolios while being true to a set of logical, moral values.  Of note, I and my teams have been engaged in socially responsible portfolio construction and management for nearly four decades.  Whether one chooses to chase the most “famous” stocks on the exchanges or to do something which results in a profit and  a benefit is an individual choice, but also speaks volumes about how the Street sells its own mission statement to the general public.

Good stewardship of the planet, combined with profitability and innovation, is finally starting to resound with the public.  After all, Covid 19 was not a rich man’s affliction, nor a poor man’s.  It was not a “Western” virus nor an Eastern.  It was not a young person’s disease, nor a geriatric one.  There is no question that our 2 year experience with a global pandemic, a life and death crisis, informed many of us to our human value, our mortality, and perhaps a greater purpose.

Going forward, it is vital that all the political backwash and the callous invective not sway us from getting the job done…..to provide for the future and the welfare of the planet upon which we all  travel.  Recklessness and brinksmanship inspire inertia and lack of willpower and only heighten uncertainties about our money, our future, and our empathy towards others.  The folly in Congress right now about raising the debt ceiling is an example of losing the forest for the trees, and deeply affects our psyches and our pocketbooks.  It is not certain whether the hangover we developed during our Covid-induced isolation regarding an “it’s all about me” attitude will persist.  But there is no doubt that the dichotomy between what’s right  and what is actually happening  is as large as it’s ever been.

With purposeful intent it is possible to accomplish two aims at once.