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.
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