“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.
