Are we there yet?
Even as we finish the first two weeks
of this new year, there are those who are attempting to draw instantaneous
conclusions about the market’s overall direction for 2023...kind of like kids
in the backseat of a car opining, “are we there yet, Mommy?”
As ludicrous as it looks when pen is
put to paper, a host of opinions are already being formed about whether this year
is, or will be, a recovery, a failure, or something in-between.
Let me offer this premise regarding
statistical sciences: data analysis is calendar agnostic. Yes,
one can look at year-over-year comparisons and annualized integers. But know this...trends don’t know Christmas
from Labor Day; July 4th from Halloween. Trends begin capriciously and
precipitously. While quantitative method
attempts to calibrate the magnitude and amplitude of certain phenomena and the
likelihood (probability) of their duration, there is no date specific
determinant to these events one any more than any other. We know that trends originate, over time, and
that they terminate, similarly over time.
Therefore, while it makes for good debate or literary alliteration,
there is no scientific calculation such as “2023”, “New Year’s”, or even “the
first two weeks of the calendar”.
Similarly, markets don’t care about our feelings or our opinions. Portfolio construction should be predicated
upon data and cycle phase analysis.
Get in or get out?
At its core, the irregularities and
vagaries of the markets make prudent scientific method all the more significant. Exposure to stocks and bonds in the past few
weeks validates that holding cash and short-term time deposits is not a default
decision, but rather an active hedge
against valuation erosion. The trends we
observe today are a continuation of events which preceded them and, in fact,
more easily understood in the context of the previous time sequence and those
which will follow. “Are we there
yet?’ Let’s just say that we are further
along, for good or bad, than we were when the current curve began. If, in fact, there is a final reckoning to be
had…. i.e., more sell-offs or quick pivot rallies….it is vital to be in a
position to mitigate against any surprises.
As such, we still conclude that the
economy is stagnating because of events set in motion during the pandemic and
responded to with fiscal and monetary stimulus which attempted to restore a
sense of normalcy, equilibrium, and high demand. Unfortunately, none except for the latter was
the outcome we reaped, hence the markets are as uncertain and disjointed as is
the economy overall.
Certainly, there are pockets of
strength in the global marketplace that we believe can be mined effectively for
capital gains. One must drill down below
the “noise” to uncover phases and groups which typify high margin returns. To wit, we see many Industrials as the
beneficiary of demand for infrastructure reform and commercial transportation inefficiencies. We are also searching not only for obvious
opportunity but for those which have elusive
confirmation indices coming in the next
few quarters. There is no doubt that
secular (generational) revolution is here in areas such as agriculture,
alternative energy, biotechnology and pharmaceuticals, healthcare, defense, and
climate/ecology. We would overweight
these categories in most equity accounts.
We are optimistically encouraged by
base-building we see occurring in those specific industries identified above,
but feel that it is too early to magnify equity risk-taking aggressively at
this time.
No….not quite “there yet”.
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