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.

Market Commentary for the week of May 8, 2023

Trains, Planes, (Trucks), and Automobiles

In last week’s commentary we referenced “following the tape” and how we use momentum indices as guidance to underweighting/overweighting certain sectors in our portfolios….in this case, Financials.  Particularly timely given the news about yet another bank seizure and purchase in the United States, First Republic.  As fluctuations in interest rates, budget policy disputes in Washington, and Federal Reserve mandates raise concerns about the future, we want to spotlight yet another sector that manifests many of the same capricious considerations, Transportation.

Overall, the companies which comprise this sector have also been volatile and underperformers relative to the market.  While the economy tries to find its footing in a post-Covid world, cargo has largely caught up to pent-up demand and in many instances resupply of inventories has fallen as a result.  This hasn’t just occurred….it was a process that evolved over many months and continues to broaden as volume, profit margins, employment of workers, and consumer debt are causing economic uncertainties writ large.

Inventory development is a constituent element of GDP, so it should come as no surprise that as capacity recedes the supply chain issues we dealt with last year have also for the most part receded.  The most significant factor to our underweighting of the Transports at this moment is an unwillingness of many companies to resupply warehouses with product in anticipation of a rebound in consumer spending….or perhaps an expectation of none such occurring.  Rather, we see a decline in the volume of freight-being-moved as expenses are going up.  Business is being forced to use assets more efficiently as costs rise.

As with any sector analytics, there are always exceptions to the rule.  The transport “winners” are companies that can absorb fuel price increases without significant disruption in the short term.  Overall, however, a decline in commercial bookings and fees for such are compounding the problems for this industry.

The other major obstacle in the Transportation sector is how resources are allocated.  Moving product from point A to point B…whether it be by ship, ground, or air….requires investment in distribution hubs, active staffing and workforce, and the ability quickly to unload vast quantities of material, and then turn around systems to start to do it all over again.  Inland deliveries are more costly than coastlines; the human and structural resources needed to fulfill the order are more expensive.  Last week, news broke about the closure and consolidation of distribution hubs from a major carrier.  A slowdown in manufacturing (alluded to earlier) foretells that freight deliveries will also be slowing

“Parallel Disconnect” revisited

Bear in mind that the economy and the stock market are not the same thing.  We’re discussing in this piece the allocation of monies into various equity sectors, but allocation into any sector is a statement about aspects not yet realized, as investors use their funds to try and “predict” what trends might gain traction in the months/years ahead.  Our particular methodology applies probabilities of capital gains and earnings acceleration to the here and now, not just what some expert predicts might happen.  This careful balancing act between hypothesis and fact is what makes our discipline both defensive  and forward-looking  at the same time….matching the micro with the macro, cyclical to the secular.

How these data correlate is the essence of the science behind quantitative architecture.  We know that as consumers spend through their Covid relief funds they will start to dip into savings and other sources for discretionary (and/or necessary) purchases.  There is a lot of speculation about how or when a deep recession might occur when the money spigot finally runs dry.  If it occurs, that, of course, would be the beginning of a massive downwards earnings revision across all sectors in our database.  For this reason, we have no problem remaining defensive in the short term and optimistic in the long term, continuing to overweight Technology, Basic Materials, Utilities, and Non Cyclicals.

Sometimes the best you can say is that maintaining sideways  (without capitulation downwards) is a uniquely “beneficial” portfolio benchmark.  

Market Commentary for the week of May 1, 2023

Knit one, pearl two

Too often, experts synthesize data into a complex tapestry of do’s and don’ts, rights and wrongs.  This is true in politics, education, spirituality, golf (!!)…you name it, it can probably be overanalyzed and or misapplied.  The financial markets have this problem, too, certainly lending their share of aphorisms about the proper “rules” investors must follow.

Everyone is experiencing an overwhelming sense of anticipation about what the next few weeks might offer but, in reality, that anxiety can be offset with fundamental discipline: those that do things well and who meet expectations consistently will be rewarded in the end.  In this case, it is a particularly good time to be stacking those odds in your favor regarding earnings, price acceleration, sales growth, and relative industry strength.  We’re talking about building a profit driven portfolio.  While there are certainly no guarantees that your objectives might be met, the goal is to mitigate against unnecessary risks.

As you look at the “news” be careful not to elicit too much emotion about a 24 hour cycle of exogenous noise.  We prefer, instead, to create opportunity in our accounts from a broader, macro perspective.  If bank stocks are in decline, for example, then we won’t fight the tape or bottom fish.  Duration/time/amplitude are your best allies, and help to avoid volatility driven by fear or hyperbole.  The economy has done the hard lifting while emerging from pandemic shutdowns, now it is just a function of these longer term cyclic dimensions to continue to support the base that’s been established. Patience is the key.

As the market rebounds towards seasonal highs we believe that our oft-spoken about themes (agriculture, technology, healthcare, energy) will obviate the negative effects of post-Covid supply chain and inflation concerns.  In fact, our models are heavily skewed towards growth industries of the future and higher equity prices all around.  We believe these generational (secular) themes are geopolitically agnostic….what heals the planet and the ills of mankind heals the economy, as well.

Of course, we all have a role to play in holding our representatives accountable for developing policy initiatives, but our belief is that the hopes and aspirations for local/regional/global prosperity and fairness will result in a positive outcome for the capital markets.  Everything operates on a cyclic rhythm.  When expectations exceed the reality on the ground….or when equity prices linearly speed out of control….there is a reversion back to the mean that inevitably occurs.  These are mathematically prudent, common, and need to be embraced.

Living in Relativity

There are compelling reasons to support our confidence.  Though we might be witnessing a diminution in global purchasing activity caused by restrictive and de-stimulative monetary policies, there are no specific suggestions that we are in, or approaching, a recession.  In fact, tight money policies have revised some earnings downwards more in line with true considerations and lessened the pain that had artificially been suppressed by lower interest rates in those sectors that were insulated, such as housing and consumer cyclicals.  Savings rates and household employment data are surprisingly benign leading us to believe that GDP for 2023 might be better than last year.

The fact that monetary policies might already have modulated inflation could give the markets some positive incentives for the balance of this year.  To be fair, nothing is bulletproof or immune from capitulation.  But profit margins are the most obvious net factor upon which we rely, and even with price pressure and modest inflation there is sufficient leverage built into the market to indicate bottom line growth opportunities.

Thus, our optimism about our existing asset allocation is a reminder that “cash is king” and the bulwark principle of our discipline that mandates sector diversification  and earnings acceleration.  It seems to me that we need fewer experts opining about “rules” and more capitalists originating efforts to replace “me” with “us”.  Somehow, lost in a bid for personal gain, we have forgotten that in the end, we are all circling the sun on the same planet.  Why not advocate for common solutions?