Market Commentary for the week of August 19, 2024

Tortoise versus Hare

Despite the past few weeks of unnerving market activity, increasing sabre rattling in the Middle East, and incendiary political rhetoric in the US, the market’s capitulation-then-rebound serves to confirm our opinion that the underlying macro fundamentals are not headed for an epic collapse.  However, the exogenous noise of current events is harming a placid psychological dynamic that began to take hold in the wake of the pandemic, now almost four years ago.  As such, we cannot underestimate the impact of “thought versus reality” and its impact upon immediate asset allocation decision making.  One can only remain true to their discipline and strategies when confronting the psychological bogey-man.

We do acknowledge that the current cracks in momentum are particularly troublesome for investors with a short (mental) shelf life.  Under the weight of dashed expectations many of these short-term idealists have been misinterpreting the panic sells of a few weeks ago as recessions, or worse.  No doubt that even as the markets were moving lower in the last few weeks the economic integers were recalibrating aggressively back to the mean.  But when money migrates out of one leadership sector another one moves in to replace it.  In other words, rotation is good, a nominal response for risk aversion.

Quantitative strategies such as ours are by definition “backwards looking” disciplines.  That is, they allow….no, require….time to digest market cyclicality.  We can state categorically that there are no disciplines that are perfect, that eliminate volatility or losses. But measuring cycle phases allows us to survive market panics by preparing in advance  for the inevitable volatilities that will occur.  Sector rotation is good for the marketplace.  It allows for leaders to lead, laggards to lag.  Sometimes, though, raising cash in anticipation of seismic events can mitigate against the impact of naively remaining fully invested.

The home stretch

Let me add that we are not trying to conflate asset allocation strategies with unbridled optimism.  As we enter into the political season it is appropriate to be defensive and cautionary about fiscal and monetary headlines.  The selloffs have been triggered in large part by those headlines emanating from the Fed’s actions (inactions) taken at the end of July.  What followed was a suspicion that the Board didn’t acutely have its finger on the pulse of real-life household pain regarding inflation and joblessness.  And yet, the data isn’t proportionately consistent with the carnage inflicted upon equity valuations.  To the contrary, most of the economy’s bad news is already in the rear view mirror.  More to the point, most sectors not related to Technology are still trading near their all-time highs.

This is not to suggest that any gloom is unwarranted.  Nothing works in a straight line in the world of parabolic stochastic quantitative integers.  Rather, ours is a world of probabilities, bell curves, cycle phases, and a little bit of historical perspective.

This time of year is always slippery to navigate.  But our advice to clients is that a tailwind developed post-Covid is building momentum and breadth.  Forced selling is always a good opportunity to reassess and rebalance allocations and to take advantage of imminent rallies that emerge from the choppiness. 

Market Commentary for the week of August 5, 2024

Election two-step

With recent capitulations in the equity markets some are thinking that the merry-go-round of opportunity might have come full circle.  No doubt, we have witnessed an historic rise in valuations over the last few months, but recent profit taking and a tiny bit of disbelief about earnings acceleration is catching up with the macro view.  Last week’s numbers don’t bear that out, however.  Nevertheless, we feel positive that underlying fundamentals are sound and sustainable.

Playing a key role in the dance are the US Presidential elections and the Federal Reserve.  The latter is committed to maintaining a baseline rate of growth for the country’s GDP, while its policies about interest rates are measured and modest.  Not wishing to relinquish relevance, the Board is playing it very close to the vest about the future direction of their initiatives...up or down…in regards to changes in interest rates for the balance of the year.  Citing progress on inflation, the Board decided at its meeting last week to hold rates steady for the time being.  No doubt, that decision will be a topic of debate between now and the election.

As for the election, the withdrawal of President Biden from the calculation has definitely upset the equilibrium...or is that “disequilibrium”... of the market’s conversation.  We remain agnostic as to predictions about the winner, but again stress our commitment to the viability of national and international fundamentals built on the back of the post-pandemic recovery.

We note in regards to the former paragraph that sufficient liquidity has been built back into the marketplace through savings and portfolio appreciation, and that whether interest rates rise or fall there is sufficient diversification and alternatives to dissuade anyone from believing that the market will experience a” hard landing”.  Emotions aside, the technical support within the Dow and S&P has been tested and held.  In fact, we would argue that the breakout is bullish and continues still.  Our only question now is whether we will break above current levels, when, by how much, and does it matter which politician is elected.

Vast decisions

Of greater significance than the technical minutiae is the broadening of the sector participation amongst capital gains performers, both domestically and globally.  Certainly there is more inclusiveness within the Tech sector, particularly Artificial Intelligence, as well as counter-cyclical strength in the Energy and Basic Materials stocks.  Lagging, but not forgotten, are the Financials, Utilities, and Consumer Staples...all good-paying dividend shares.  And for those clients who refuse to entertain the volatility of the equity markets there are sufficient returns in short and medium-term fixed income products to suffice their need for stability and yield.

And still, we expect even further expansion of sector rotation and participation.  We favor Biopharmaceuticals, Infrastructure, Agriculture (food), Alternative Energy, and Water equities as an homage to our socially responsible mandate and moral responsibility to each other and the planet.

Having said all that, we do recognize that caution is always appropriate.  Entry points are becoming harder to find and fewer as near-term expansion in some sectors makes those categories too expensive, and recent capitulations have made others too risky to bottom fish.  We therefore acknowledge that prior to the November election there is the risk of a 3-6% consolidation in share valuations built into our calculations.  Monetary factors are also priced into the market right now.  Therefore. the political back and forth about deficits, social spending programs, taxes, and the “moral” direction of the country might put investing into a bit of a headlock (deadlock?) before the next thematic economic trends are revealed.

You can rest assured that behind closed doors of each political party there are strategists who want a financial massacre to occur and those who will do anything to avert it (although we are not naming names).  Wall Street wants you to keep buying their products and Main Street is urging you to get out and shop locally.  There is no shortage of inspiration urging you to buy cars, homes, medicines, clothing, and even gym memberships (maybe that’s more during New Years, no?).  But our message is to be thankful for the portfolio gains already achieved and to invest in one’s sense of optimism about the future, no matter who wins…… 

Market Commentary for the week of July 15, 2024

Is Up really...Down?

Consider why some sectors endure during tumultuous times and why others are catapulted here and there with the winds of emotion.  During the last six months the market has seemingly jumped off the page with feel good stories of “new highs”.  Ask yourself whether that wave has you feeling good about things...or nervous about the peril that might lie ahead?

The biggest threat to the market is actually a higher level of speculation brought about by the unburdening of threats, perceived or otherwise.  And yet, eroding profit margins and defensiveness on the part of budget offices (corporate and household) has behavior turning decidedly conservative.  Low interest rates cause aggressive behavior; higher rates cause attitudes to stiffen.

So, if you are unaware of or disinterested in the statistics the facts are that when the market has been making new highs only about a quarter of the elements of the S&P have been participating.  Many, if not most, of the sectors are in serious trouble when it comes to expanding their workforce (not) or planning for new initiatives and spending (also, not).  Employment and inflation are the twin gargoyles at the gate.

We get it…when the market is up everyone assumes good news.  They reason that following the herd is a good investment strategy.  They fear being late to the party, so they jump in with both feet.  But, of course, the inevitable ups and downs occur.  In fact, the data shows a serious trend developing downwards in sectors like retail, housing, consumer discretionary, and some industrials.  With many safe havens disappearing investors are torn between following the uptrend or seeking shelter while the getting is good.  And rightly so because the prospect of additional earnings surprises magnifies our attention to how slowly the global central banks appear to be acting to address monetary policy.  This is why we have been looking to put money into longer term demographics like Energy, Basic Materials, Financials, Utilities, and Technology. 

How elusive it is to try and follow the money supply and diminishing consumer expectations concurrently.

Down is really...Not Good!!

Last week’s market numbers puts into better focus the risks of speculating blindly into “story stocks” and ignoring the need for secular, generational planning.  Despite Wall Street’s protestations to the contrary, they want  you to take risks, buy their products, and try to capture the gold ring of “special opportunities”.  And yet, investing was once a noble art, combining analytics of economics with the social sciences and macro thinking.  More than ever it has become the art of seduction and sleight of hand designed to magnify the herd mentality.

Most businesses that rely upon consumer discretionary spending are showing a significant decline in year over year expenditures (2023-2024).  Spending figures for that period have declined by close to 5 percent even as the appetite for post-Covid activities has intensified.  This dichotomy between “real and perceived” is approaching a threshold that might spill over into hiring and inventory expansions.  For those of us who grapple with high inflation in household expenses (food, energy, housing, medical), any slowdown in spending could be big trouble for significant swaths of the economy.  As mentioned above, only a small percentage of companies are truly participating in the market’s growth and only a smaller percentage of wage earners can afford to keep spending manifestly.  It will be interesting to keep an eye on these data and how/if they might affect the US elections.

So, it’s an interesting dynamic at work right now: the data are mixed, investors don’t (yet) seem perturbed, and the markets are running.  The Fed is playing it close to the vest while inflation seems to be held at bay.  As alluded to in this week’s title, is “up” really up or is there something more diabolical to be read into this Summer melancholy?  Investors are taught not to fight the status quo and to “play the trends” but as we drift into election season you’ll start to hear more about “what’s wrong” with the economy from opponents who need to score knockout points.

We prefer to maintain a long-only bias that builds upon the multitude of efforts made in the post pandemic reality.  Markets always seem to have a positive bias in one way or another so our position is to use bold ideas and common sense as our roadmap against the noise.

Market Commentary for the week of July 1, 2024

Spare the Axe

Do you remember the old riddle, “If a tree fell in the woods, and no one was there to hear it, does it still make a sound?”  Well, today in 2024, we have a version of that question that similarly begs the question, “if limbs were falling from a branch high above, would you have the presence of mind to know it, look up, and get out of the way?”

Although this missive is tabbed as a 3^rd quarter expository, it strikes home more as a 2025 conundrum because contained in the current data is a cause and effect that we believe is clearly being overlooked.  Let’s begin with the fact that the stock market averages are trading at record highs.  How, then, does one reconcile the enormous psychological and financial gap that exists between those who report that they are “comfortable” with their financial situation and those who are desperately falling behind?  Why are corporations acquiring new companies in their portfolios but downsizing nearly 25 percent of the workforce?  How are record earnings propelling equity expectations when high interest rates are decimating the bottom line?  To be sure, most of the globe’s economic news is positive even when measured against highly grossed up expectations. But the symmetries are way out of balance.  Is anyone looking up at the falling limbs?

Further, the contentiousness of the 2024 Presidential discourse worries us.  Markets count on a cohesiveness and continuity of economic principles but current deviations from the norm would account for indecisiveness and fear permeating the electorate.  Clearly, in that kind of environment, fiscal (political) judgement regarding policies and initiatives is stultified.  The potential for voters simply to give up is a possibility and strengthens the vocal minority who say the whole system is “rigged” or “unfair”.  The attitude has become that no one or nothing makes a difference  which exacerbates even further the apathy that citizens and businesses feel about following the rules or being good citizens.  In more ways than one, “downsizing” is becoming a way of life far too often.

And yet, the cornerstone of our optimism is that it all works out in the end...usually.  While we allow for the pull and push of political debate a majority of people support isolationism, closing borders, and law enforcement under the guise of altruism.

It cannot be ignored, however, that the landscape has dramatically changed.  In normal times conciliation is a fact of life.  The risk premiums have expanded like no other time we can recall.  The unknown outcome of the election in November will exact a higher cost in terms of volatility and strife than many might predict, possibly resulting in further erosion of confidence and optimism.

Markets

We are therefore raising our projected volatility in the financial markets for the balance of the year and into next.  It is our suspicion that inflation will not budge, perhaps moving higher in certain core goods, which limits room for bond and equity appreciation.  Unless political leaders can accommodate one another private consumption might sit on the sidelines for several years hence.  Consumer confidence is weak right now and affecting spending habits that once were robust immediately after the covid pandemic.  On the other hand, low confidence helps to limit an upsurge in inflation.  We clearly observe that we are on the cusp of major spending changes in the next few years.  The pesky issue of interest rate direction, while not something the average person obsesses about daily, does affect decisions about future capital expenditures.  Consumers are the engine of economic capacity and inventory growth.  Budget and spending inertia could impact political and household goal-setting for years to come.

Much of this turmoil is politically induced, and not definitionally economic in the truest sense.  The first half of this year was, in fact, quite successful economically.  Businesses have reemerged from a two year pandemic hiatus, employment and wealth building were both on record pace, and the markets, as noted earlier, are breaking all time highs.  The impact of both the medical and economic response to the Covid virus has been successful and is raising the bar even higher for predictions about the economy.  All the while, we watch out for the “limbs” above us…just in case.

The success of the markets is also its curse.  Higher interest rates continue to be the sticking point in our projections.  Based upon current earnings forecasts, and the impact of higher borrowing expenses, our valuation models indicate the possibility of a rough Summer ahead.  This “seasonal rotation” should be completed before the end of year, mostly influenced by the elections in November.  We would not be surprised to see a contraction of ten percent on the Dow and S&P which would bring the numbers closer to fair valuation.  Therefore, we are advising our clients about near-term caution in the equity markets.  We do not see the question as one about “up or down”, but rather one of timing.  Can the elections lead to a constructive debate about priorities and policies that allow for sequential cycling of sector allocations?  Without strict expectations and direction the consequences of undisciplined investing become more penal and more meandering.  In this observer’s opinion the likelihood of those issues being resolved in a convivial fashion are not good.  

One must consider that as recently as two years ago the financial markets were in a tailspin.  Valuations were so low that issuing a “buy” recommendation was easy stuff.  However, the valuation expansion in stocks right now makes the confluence of fundamental and technical analysis all the more important.  It may take several more weeks…or months…of consolidation and capitulation to bear this out but we see significant recalibrations that are necessary to find equilibrium and opportunity in a marketplace that is so extended.

For example, energy (oil) stocks are highly overvalued based upon events in the Middle East, Ukraine, and elsewhere, and influenced by surging post-pandemic pent-up demand for travel.  If demand were to wane so too would valuations of Energy stocks.  We prefer, instead, to value these and other commodity equities based upon supply and the generational depletion of natural resources, as well as shifting demographics and expectations about climate and the globe. One might also include other commodities in that evaluation such as water, food, gold, and copper.

Further, our third quarter equity recommended list over-weights Tech stocks and Utilities, clearly a sign that while investors are interested in capital gains, they are more concerned about preservation of wealth during tumultuous times.

Hidden in this message about supply and demand is a not so subtle contrarian view about retail stocks.  As mentioned earlier, high interest rates and a diminishing appetite by consumers to part with discretionary funds is going to have a negative impact upon earnings in this sector for the balance of this year.  Brick and mortar stores, as well as dining establishments, are having a difficult time bringing in traffic, thus their shares are suffering also.  Juxtapose their inertia against the enormous expansion in infrastructure projects worldwide (roads, bridges, rail, etc.) which I believe will boost capitalization of industrials during the same period.  Of course, we continue to have one eye on the future by focusing on socially responsible objectives such as agriculture (food insecurity), technology, housing, water access, and renewable energy sources.

We are also proponents of modest exposure to short term and intermediate interest-bearing time deposits to maintain balance and defensive allocations within high net worth portfolios.

Conclusion

Our work has always been predicated upon the use of quantitative modifiers to enhance portfolio valuation through the use of information systems that create greater efficiency in portfolio diversification decisions.  But because so much of the current data is skewed by emotion and fear, rather than data and integers, it becomes more difficult to engender the shared citizenship required objectively to analyze the macro and micro data.  The rebuke of, and inability to accept common sense is the most vexing issue of our time, both financially and politically, and muddies the overlay of any market strategy worth its salt. 

At no time in the last 3 years have we been more conflicted by the lack of purpose and direction in macro events which form the basis for our asset allocation decision making.  This equivocation stems from the harsh rhetoric in our political debate; war poverty and immigration/migration worldwide; and uncertainty about the future.  The most important questions for investors in the coming quarter revolve around how the current environment of fundamentals meld with the psychological climate of mistrust which permeate the discussion. The agenda, such as it is, is disjointed at best and poses severe roadblocks to our current quarter expectations.  We caution again to look up and listen for the sound of limbs falling….

 

Suggested Balanced Account Asset Allocation Q3, 2024

Equities:            48%

Fixed Income:   40%

Cash:                 12%

 

 

 

 

 

 

 

 

 

 

Market Commentary for the week of June 17, 2024

All time high

Wirth markets surging into new highs almost feverishly these days, it’s important to distinguish between temporary leadership and secular, or demographic, leadership.  Losing the distinction between the two can lead to unintended portfolio outcomes.

Consider, for example, a distinction between losing forever the supply of fossil fuels that power-up the world’s economies and the hype that surrounds the introduction of any new “shiny” technology.  To be sure, those sectors which resonate from a longer term demographic and which offer consistency and durability might not seem so attractive to speculators and traders, but being able to quantify duration and magnitude, earnings and relative strength, offers greater emotional probability of defining performance and outcome than following a herd off a cliff. The number of Earthly problems that need fixing is too vast to count but includes water scarcity, food insecurity, global political discord, housing and shelter shortages…….

The fact that the market is “doing well” should not surprise anyone.  The whole story of late has been about a remarkable post-Covid fiscal and economic response and recovery…a real feel good theme that gets everyone swept up into a frenzied euphoria.  Wall Street wants you to know it, and so too do our political leaders.  But the biggest threat to such enthusiasm is absolving oneself of understanding the facts that pervade the underlying narrative.  With high interest rates and corroding profit margins comes a price to pay later on.  These facts are like a blunt instrument waiting to hit you over the head.  Risk taking and uninformed buying in this environment can be dangerous.

The current knee-jerk buying spree results from a desire not to be left behind or isolated from the crowd.  The optimists search for reasons to drive prices higher.  Conversely, the pessimists are using any good news as a reason to take profits and sell altogether.  This confluence of varying opinions is eerily similar to the “he said, she said” mania of other boom and bust cycles in recent years.  The old-timers, like me, said “no” to the New Paradigm-ers who claimed that “it was different this time”, while the young bucks bid up stock prices with youthful abandon.

Of course, markets are cyclical (always) and no one is ever completely right or wrong.  Every subtlety needs to be evaluated for its staying power.  One must always assess the longer term macro consequences.

If you are not aware, or disinterested, in the statistics consider that even though the markets are making all-time highs not all sectors are rising at the same rate, nor even participating in the largesse.  Listen to most consumers and they might tell you that they are “under water” and falling further behind.  The facts might not bear that out, as many consumer brands are raking in record profits but here again is the dichotomy between Wall Street and Main Street.  We know that markets are inspired by data, analysis, and greed.  But consider why some sectors endure and others are catapulted to-and-fro by the winds of emotion.

Nowhere to go but…..

Events during the last 6 months puts the rise in equity prices into better focus.  An extremely liquid consumer became the engine of valuation expansion.  Story stocks, particularly in Artificial Intelligence, permeated the landscape with promise and hype.  Risk-taking replaced conservatism and seduced those on the sidelines into placing their bets on stocks.  The original scheme of using the market as a long term opportunity was once again supplanted by those with a herd mentality and nimble sleight of hand acuity.  Thus, the premium paid to play the game grew larger and larger….and here we are.

Typically, when reactions become excessive, fundamentals are abandoned to chase a loftier baseline, and that in itself becomes part of the problem.  More cash inflames the possibility of depreciation later on. But buyers can’t be bothered by thoughts of cyclicality or decline. Subjectively, they might be scared of a pain they fear worse than losing their health….namely, losing money….but greed and excess are strange bedfellows that undermine rational thinking when chasing wealth.  For them, risk and making money is the morality play that keeps hope alive, feeds the family, glorifies their existence, and justifies a lack of sympathy for others.  It’s no wonder, then, that the markets can’t get out of their own way.

Market Commentary for the week of May 20, 2024

Aurora Borealis (a personal tale)

For several days during the past week, stargazers have been obsessing over a spectacular natural phenomenon, the Aurora Borealis, an evening lightshow of pinks and purples and greens caused by coronal explosions of plasma and other materials which intersect with the Earth’s magnetic field.  Now, I’m no astrophysicist so this tome will not be about the laws of light forces, geometry, and particle sciences.

But I do want to convey to my audience a sense of wonderment and profound impact that these events inspire and how they directly relate to my profession and persona…..

I’ve shared in earlier missives the galactic event that most changed my life and my perspective about the world in which we live.  In 1968, Christmas-time, three astronauts aboard the Apollo 8 space mission sent back to Earth the first photos taken by a human being of an “Earth rise” above the lunar landscape.  I’m sure you’ve seen the photo.  This majestic image captured the enormity…and the sheer isolation…of our planet from deep space hundreds of thousands of miles away.

The reasons that this image affected me so deeply are profound.  I was a teenager at that time transitioning from high school to college.  Under “normal” conditions that is a difficult time for young adults trying to find their way in the world…and what a world it was.  The US was at war in Vietnam; there had been a summer of domestic unrest and protest; and we were shocked by two political assassinations  that cratered our hopefulness about the future.  It seemed as if the world and our future was shrinking right before our eyes.

And then this image…..taken from a tiny space capsule with three brave souls aboard who showed us how small and insignificant our planet really was in the vast cosmos of time and space.  I was moved to tears at the time, and still get emotional, and inspired, when looking at that photo.

From the vastness of space we could finally see how the oceans connect the continents; how territorial lines of demarcation are irrelevant to the planet’s ecosystem; how conflict, war, and peace are really parts of the same continuum.  I came to understand that without understanding the totality  of the globe none of it makes any difference.  We all ride the same planet together.  Science connects us to the arts.  Commerce is intricately woven into the human spirit.  Medicine is sports and recreation.  Being of faith is the same as good business.  Happiness and conscience are intercontinental, and not for sale. 

So why discuss this in today’s commentary?  How could something that happened over a half-century ago be at all relevant to today?

Because the very nature of investing… despite all the algorithms, calculus, and statistics…has a symmetry, a comprehensiveness about it.  If not, if all you seek is to hit “home runs”, then you’re not investing….you are gambling.  Your financial advisor becomes your croupier, and the whole exercise fails to live up to a nobler cause.  Yes, profit-making and building net worth are specific client objectives and how I earn my livelihood.  But somewhere in the recesses of the enterprise is buried the notion that we are all responsible for the well-being of our only planet.  It’s about time we put a human face on all the integers and try to gain a real perspective about what all the data means and who’s affected/influenced by it.

You want to invest in natural resources?  Fine, but be respectful of the condition you leave the environment.  Food?  How about making sure that agribusiness is also a social compact, one which leaves no child hungry.  Energy?  A dwindling natural resource that requires conservation and sustainability.  Technology is everyone’s  future.  The list of inclusivity, nuance, and market silos is too long for this page…

My work in the socially responsible spaces is well documented.  There is no reason why we cannot use our collective talents in math and science and engineering to do more than simple self-aggrandizement and profiteering.  Go outside this evening, stare into the darkness of space, and consider your fellow time travelers…past, present, and future….and think on your contribution to them, as well as to your own family, and ask, “is everyone alright tonight?”    

Market Commentary for the week of May 6, 2024

Power up

As earnings season unfolds investor’s attention is turning to companies that have sustainable business models with an expectation of developing scalable growth for the foreseeable future.  Thus far, the amalgam of businesses that have accomplished that feat this quarter is quite broad, hence the run-up in stocks.

But more importantly, one must focus upon quality over quantity, consistency versus heroism.

Thus, our research is developing an unusual bent regarding the mania over artificial intelligence (AI).  By digging a little deeper we are tackling this new technology with an old approach: looking at the infrastructure required to bring these technologies online, namely energy and utility equities.

Although far less glamorous than discovering unique “techno-darlings” these sectors are essential to the underpinnings of a new world order that is about to burst onto our horizon.  To ensure that the power is turned on when the AI switch is pulled there has to be a reliable energy grid.  The establishment of an AI social and business compact depends upon complete operational and distribution support.

For eons your parents and grandparents used the energy/utility consortium as supplements to their investment portfolios’ income and capital gains objectives.  Today, we would argue, that strategy makes even more sense.  Their standing in their local communities, the regulation under which they operate, and the function they satisfy allow these companies to operate as fulfillment centers for homes and businesses.  Additionally, they resemble many of the “better mousetrap” objectives that we look for in our research.  Their vital place in the technology realm make them an underappreciated resource for burgeoning tech.  It’s not an exaggeration to say that as goes mainstream utilities so goes artificial intelligence.

Boring?  Maybe!

Now, while utilities and energy companies aren’t “sexy” to talk about, sometimes stating the obvious makes for better outcomes.  In fact, for nearly four decades, my databases have enabled the creation of several silo-specific portfolios in areas such as health and life sciences, water, agriculture, fixed income, and alternative energy.  Our fixed income research, for example, has allowed us to maximize dividend yield in our portfolios while maintaining “laddered liquidity” in the event of massive economic shifts.  Our current affinity for the utility sector is both a call for defensiveness against rampant equity valuation expansion overall, as well as a generational realization about the development of new technologies and infrastructure.  What was once “old” is new again.  Utilities today are not your grandparent’s annuities.  They are high tech solution providers to the globe’s ever-expanding technology base.

As such, the need to create viable energy sources goes well beyond traditional fossil fuel companies, and includes hydro, nuclear, and wind.

Finally, why is our research bias turning defensive; why infrastructure; why shy away from the glitz, glitter, and hype?  Because defense limits volatility.  Drawdown is the most onerous of portfolio penalties.  Defense is the opposite of cyclicality; it makes it unnecessary to try to ride the biggest wave….or crash when your bet is incorrect.  Defense obviates the effect of exogenous noise when speculation is running hot.  Irrespective of last week’s Fed announcement about interest rates, there is always a time and place to diversify risk, maximize yield, and protect against downside capitulation.  Playing the waiting game while collecting dividend income is an effective way to parlay capital accumulation from financials, utilities, and energy companies without the equity combustibility (no pun intended).

Making the investment process less complicated is good common sense, and good strategy, too. 

Market Commentary for the week of April 22, 2024

Making sense from the noise

Increasing geopolitical risks are having an impact on global output financially and investor anxiety psychologically.  And yet, the financial markets are on a powerful run the breadth of which is essential to a post-Covid sustainable recovery.  So how does one reconcile this parallel disconnect  between the two?  Are we in a “consolidation” or a “dip”, a “reversal” or a “pause”?  Just how to define such things?

Firstly, it is imperative that no matter the bias a strict methodology must be employed…..always!!  In our case, we initiate our analysis with a realistic quantitative assessment of all macro factors, economic, technical and otherwise.  At present we believe that fundamentals are strong, getting stronger, and that despite pauses or interruptions there are sustainable trends in which to invest.  Next, we disqualify from inclusion any business or company that doesn’t have a track record of earnings, earnings acceleration over a three period (minimum), or stochastic outperformance within their respective business sector.  Over the long term we have found these parameters to be the most helpful in reducing excessive portfolio volatility caused by outside “noise”.  In our current quarterly advisory equity research, for example, there are more companies that fit these criteria than in previous quarters over the last three years.  Market breadth and sector diversification are heightening our bullishness in the long term.

Further, we believe that these qualifiers usually distill our analytics to the epitome of quality because they identify businesses that focus upon their end user, their clients, first and their shareholders second. This is not to diminish the significance of a profit motive.  Rather, the concept of building a better mousetrap  has always proven to have financial sustainability.  Our focus upon consistency and longevity allows us to maximize the potential for dividend expansion and capital gains.

As such, we are highly performance and process oriented.  Expressed another way, the absence of significant drawdown in any portfolio management discipline moderates the risks and magnifies the upside possibilities.

Let’s be specific

My readers also know that my decades-long fervor for socially responsible businesses is crucial to our program.  Despite many avoiding the topic altogether….perhaps not to appear politically  “soft” or “appeasing”…the public are now reconsidering their previous avoidance and allocating a greater amount of time and interest to numerous global crises.  As an investor, you can either be specific to the industry or companies you research (i.e. water, energy, healthcare) or you can broaden the aperture of your analysis to include what has become a comprehensive global tectonic shift in problem-solving.  In either case, examining these topics is not only proving to be good citizenship but it is also highly profitable in the long run…exactly the opposite of the parallel disconnect referred to earlier.

Innovative application of science and technology will cure diseases, create alternative energy, feed the hungry, educate and include the disenfranchised, and break down impediments to creating GDP where none existed or had lay stagnant for decades.

These facts, along with many other factors, are the reason for our bullishness in the face of so much pessimism.  The potential for good far outweighs the obstacles in place, politically or economically.  As in sports, the “big Mo” (momentum) is the trend most important to creating success…in this case, secular long-term capital gains.  Make the most of it while it’s here.

No doubt, there will be headwinds and other exogenous disturbances in the days and weeks ahead.  Thus the reason for our admonition that all money management begins with a methodology  is even more cause foe investors to use this time as a chance to reflect not just upon the individual securities in their portfolio but upon the aggregate of their asset allocation and its relevance to the risks of our time.

Market Commentary for the week of April 1, 2024

 What’s Mine is Yours

We saw extraordinary resilience in the financial averages during the last quarter, particularly in the number of new highs and other advancing issues outpacing analyst’s expectations.  In doing so, any uncertainty about trend sustainability and investor confidence was upended.  The market’s current plateau has all the doubters in an uncomfortable place….somehow they just love a good “negative” narrative. No question, however, battle lines are being drawn which clearly delineate the bulls from the bears.

The significance of this emotional dichotomy is that action plans, political discourse, and financial reasoning….good or bad….can be now be qualitatively identified.

As we write, earnings modifications are accelerating, acknowledging that January 1 iterations were too timid.  While growth might not be extraordinary for all, it clearly gives to those who thought the market would decline in 2024 something else to think about.  Our year-end GDP forecast is on the higher end of the spectrum, and more aggressive than we wrote in December.  Clearly, most current “revisions” of the forecasts are about upwards surprises, not downwards.

The trouble with the pessimist’s point of view is that they have difficulty separating what’s happening in the economy from what they see around the kitchen table; neither are directly correlated, though.  In the past, we coined the term “parallel disconnect”  to refer to this oxymoron.  But with the enormous amounts of cash held in abeyance by consumers and businesses we believe this time that there is a sufficient safety net of capital that will keep upside performance percolating.  It matters not the capitalization or geography of the investment, only that the goal is to build a better planet for its inhabitants.  In other words, moderation in one sector will not necessarily disrupt the success of any other.  There are simply too many things to get done that we should expect….or encourage….a global recession.  An old sports maxim states that “you can’t win a game in the first quarter but you sure can lose it.”

Strategy

In many ways what we’re discussing in this missive is how straightforward it is to win (or lose) the public’s trust when it comes to finance, politics, and morality.  It is fashionable to tear down the institutions when it seems they don’t agree with our point of view. But it is particularly vexing when those same megaliths demonstrate a lack of concern for  us, their consumers.   Take, for instance, an insurance company when a weather disaster strikes.  We expect the “good hands” to be there when we need them to lend financial, technical, and emotional assistance.  When they fail to deliver relief, monetary or otherwise, in a timely manner it’s upsetting, of course.  Many businesses that have a utilitarian function are sometimes exposed to be just like any other business….a vehicle for creating profitability for their stakeholders.  Look, we have no qualms with corporate profitability, but the crux of this hypothesis is that the common good might sometimes be impeded by a fabricated expectation of service from the companies that ask us to call upon them when needed.  A case of profit making for the sake of profitability versus “righteous” benefit and  good profits. 

Toymakers, automobile manufacturers, public utilities, financial institutions, hospitals and other enterprises that provide a “public service” need to keep their pledge and realize that their inordinate profits are a by-product of creating superior provision and not just their “right” to collect our premiums.  Think about it in the abstract: any company could become profitable if it succeeds at giving the public what it wants and needs, what it pays for, and if done honestly and responsibly.

Without question, the post-Covid economy has given businesses an opportunity to rearrange their operating models to conform more closely to a changing public square.  Unfortunately, some of the realignments have uncovered a bewildered board of directors, intent more aggressively on protecting what shrinking margins they still profess to “own”, all at the expense of their consumers and the public perception of their moribund business model.  In some cases it means layoffs and share buybacks which leads to an even greater sense of mistrust in the public domain.  Trying to manufacture profits through alchemy, misdirection, and machination is the fastest way to oblivion.  Dishonesty, deceit, and unprofessionalism create the very narrow-mindedness these organizations are trying to avoid in the first place.  Here again, building a better mousetrap has fallen victim to greed and self-interest. 

And, no doubt, consumers have gotten wise to this kind of corporate chicanery and have become more discerning with their purchasing power.  When large banks and brokerages repurpose old products and marketing schemes, or broadcast “feel good” television and radio commercials of seniors walking on a beach, some in the public see through those efforts as simple-minded attempts to part them from their money.  As each dollar becomes more precious, the community is demanding ethics changes from those to whom they give agency and accountability for public service on their behalf.

One of those public services is water.  It is not just a commodity or utility, it is a necessity for life.  My investment units have actively been engaged in this space for nearly four decades creating model portfolios and investment strategies related to solving (and, yes, profiting from) these complex issues and now we finally see the media earnestly allocating more coverage to socially responsible causes, perhaps engendered by climate change, population migration, or military conflict around the globe.  The allocation of scarce resources, like water and food, demonstrates a systemic inequity in how depleting natural resources are obtained and distributed. Much of the worlds’ sewer systems are antiquated and crumbling.  Billions of dollars will be required to remediate water-related projects. Similarly, the retrieval and creation of arable farmland is an arduous task for future generations around the globe. New infrastructure creation linked to recovery, purification, and delivery of potable water represents one of the most important financial (and moral) opportunities of this century.  Hunger and drought are as important to eradicate as is hatred and dislocation.     

The price for waiting on these, and other, social issues will only increase over time.  For example, desalinization of ocean water might be expensive but it is the most effective way to create useable drinking water from an unlimited source. Water is one of the few commodities on our planet that is either directly or indirectly linked to the production of nearly all products.  Put another way, without it the global economy would be rendered purposeless and impotent.

Because our industrial, commercial, and capital base depends on the viability (and enthusiasm) of its citizens, there really is no greater mission than to (1) acknowledge and appreciate one’s personal largesse and (2) to look out for the well-being of our neighbors.

Conclusion

After a strong start to the year we predict the economic momentum continues.  Earnings were better than expected in many categories while the Fed continues to signal a slow and steady hand on interest rate policy.  From a macro perspective we are early in the post-Covid recovery game.  It is so important to look at the forest, not the trees……macro, not the micro.  Technology, Non-Cyclicals, Commodities, and Financials should perform well in this upcoming quarter.  The market will never be “happy” with its surroundings; that’s the nature of the beast.  But managing risk and employing prudent asset allocation weightings is my  job, and not for the faint of heart, anyway.

The forces exerted upon the financial markets are prolific.  At each day’s close someone is either happy or sad.  Talking heads in the media or at political rallies might try to assuage our anxieties or color our opinions, but each of us innately knows our own boundaries and capacity for risk and reason.  Fear is not the problem.  The real problem is when we are misled or lied to.

As sure as the market surge is real, there will come an inevitable parabolic reversion back to the mean as was occurring in the final weeks of this past quarter and, thus, our enthusiasm and patience will be tested anew.  And when that happens there had better be honest brokers and businesses quickly stepping up to quell our fears and get us back into the game.  Inertia is not a choice.  We have to accept our shared responsibility to each other and leave a better place to our heirs.  No one really “owns” their time here on this planet.  They only serve as humble caretakers of the rich bounty it provides, nurturing it for those who follow.

Suggested Balanced Account Asset Allocation, Q2 2024

Equities: 56%

Fixed Income: 40%

Cash: 4%   

 

 

 

Market Commentary for the week of March 4, 2024

Own or rent?

There is very little argument about the myriad number of factors that have coalesced to create significant economic changes in a post-Covid world.  Many years of monetary and fiscal stimulus, for example, might have some blaming the Federal Reserve and Congress for hyperinflating the economy, but recent data suggests that much of the domestic economy has adapted quite well to the changes… certainly better than the expectations of pundits. In fact, it might even be hinted that a balance now exists between fixed income and equities that hasn’t been seen for decades.

Effective portfolio construction is always about minimizing drawdown and other exogenous risks while highlighting recognizable facts to achieve point A to point B consistency of return.  My methodology, for example, relies heavily upon earnings acceleration, sector strength, price momentum, and stochastic outperformance, all of which define the trendline direction and magnitude.  These precursors do all the blocking and tackling well before we sit down to evaluate the “minutiae”.

It is also important to begin with a macro perspective.  Resilience of certain ideations weaves through the history of mankind, those which focus more upon “what’s right”  and “what’s possible”  versus the unintended obstacle about “what’s wrong”.   Central bank’s interest rate hikes in recent years, for example, might be considered an onerous imposition upon unfettered borrowing, but they also regulate impetuous behavior in a way that eliminates future gluts and other crises.

Thus, it is our belief that strong secular trends are more powerful than defensive and value investing.  Leadership is constantly evolving. But the necessities which bind all humans to one another…stable home; potable drinking water; clean air; a good education; and strong homeland security…are ineradicable to building a life……… and one’s portfolio!!

We are not suggesting that the glass is always half-full.  That kind of mindless optimism blinds one to the important public discourse that goes on around us.  But we are mindful of the shortcomings in the current social model that could derail a fulfilling outcome for all citizens, such as a widening wealth gap between rich and poor, a breakdown in spirituality, inequities in our healthcare delivery, a culture of gun violence, and a vexing immigration problem.  Do these issues negate the good that inspires innovation?  Of course not.  But within these divisions are also the seeds of research and evolving ideology that can produce social and economic results.

Normalizing the variables

The challenge for any investor is to prepare for the worst, hope for the best.  Tactical asset allocation minimizes the potential for losses and/or any other surprises that might occur outside the realm of “normal” observation (Covid, e.g.).  Consider that prior to the pandemic when interest rates were still low our clients had sufficient cash available in their accounts to exploit future bond buying and equity opportunities.  Asset allocation is dynamic, ever changing.  Observers of our work have seen how our asset allocation, by class and by sector, rotates throughout the year.  Today, both our equity exposure and our short term bond portfolios are neatly correlated away from risk and towards capital gains potential.

We are well aware of the market’s obsession with inflation and high interest rates and their combined effect upon prices, production, and consumer sentiment.  We share a wait and see predisposition, also.  However, as mentioned above, a pessimistic “glass half-empty” perspective can lead to a lot of trading mistakes trying to keep ahead of the headlines.  We look at today’s data with an optimistic prejudice.  The recent upturn in equity markets, along with improving fundamentals in many sectors, implies that we have achieved a “soft landing” and likely will sustain that path.  Most of our data categories are showing a positive trendline.  Sectors that we like include alternative energy, healthcare, agriculture, biotech and pharmaceutical research, infrastructure, and consumer durables.

Above all, our anecdotal observation is telling us that the planet is eager to tackle improvement and problem-solving.  You cannot downplay the capacity of one human being to create breakthroughs in products, services, business and government, and to inspire others.  Our fellow man deserve nothing less than fostering a level playing field for that person…or persons…to emerge from the pack to make those differences.   

Market Commentary for the week of February 19, 2024

You made it this far….

As investors muddled through another calamitous week in the stock market, brought about by a perceived “postponement” in Federal Reserve interest rate easing, might I suggest that we need to lower the temperature just a bit when it comes to reacting each and every minute to what one hears on the news.  The post-Covid era presents relentless challenges to stake holders, that we would agree.  That moment when we realized that the world had inexorably changed began a new timeline of portfolio potential.  Education, Technology, Consumerism, Healthcare, and many other headline topics embarked upon new expectations, and opportunities, forever transformed.  The language we use, as well as the sciences and technologies to measure them, might seem unrecognizable right now but portend, nonetheless, an evolution that is generational.  For many companies, their market share is likely to change…sometimes for the worse.  And yet, facts not yet revealed will determine the winners and losers of the future to adapt for decades and beyond.  Every business must necessarily reinvent their model to find a way of conforming with the world’s new paradigms.

Investors in the public arena should be looking to deploy assets differently, as well.  Allocations which reflect changing dynamics in the overall economy have to correlate for sustainability and moral compass.

Creating meaningful portfolio appreciation is more than just following contemporary trends but rather seeking out opportunity from amongst a vast array of social and business imperatives that might not be identified with today’s vocabulary.  In many cases traditional assumptions don’t apply.  The belief that “old” technology, for example, seamlessly morphs into the future is laden with myth and pitfalls. Instead, faster, better, less expensive  is how you capture the fancy of today’s CEO.  Lucky for us, as portfolio managers, that our focus and discipline remains consistent: earnings, secular pricing trends, and stochastic relevance are the omnipresent methods that have created wealth throughout the decades for our clients irrespective of market interruptions.

….now where do you go?

Innovation is always the main driver of profit-making.  Large cap or mid-cap, unique shifts in biotech, telecommunications, technology, and alternative energy have opened new geographies and compelling new opportunities for capital gains.  These sectors are ripe for massive acceleration in earnings and significant overweighting in our portfolios. As mentioned earlier, the laggards sometimes become the leaders of tomorrow.

In fact, the most efficient way to uncover future success is to apply earnings growth to implied 12-month price projections.  In those industries where volume and sustainability are magnifying, we constantly review possible price inflection points of entry along their trendline. The kind of manufacturing capacity required to sustain profits for decades can only be achieved with capital investment in and from the private and public markets.  Having the vision to expand beyond today’s limits defines the “new” landscape for portfolio alpha.  Companies that positively impact upon the lives of our planet’s inhabitants will always have a leg up on the competition.

The bottom line from our perspective, and our response to last week’s market anxieties, is that fundamental and technical market indices haven’t changed significantly in the last half-decade...pandemic was an aberration, not a new normal.  Those sectors that were in ascension (healthcare/biotech, consumer non-cyclical, infrastructure, technology, alternative energy) before Covid continue to build secular momentum.  Recently, many other sectors are breaking out above support.  Our equity investment percentages have increased  in the past few months by over six percent.  There is no “magic” to what is occurring in the stock market…years of fiscal and monetary interposition are finally paying off.  We acknowledge, and will participate in, the uptrend.  For the moment, we are comfortable with the interest rate and cash positions of our accounts which seek a balance between short-term risk (bonds) and longer term capital appreciation potential (equities). 

The pandemic and geopolitical disruptions have created a new dialogue about how to meet the needs and aspirations of a changing domain.  Being attuned, more engaged, more clear-headed, more patient, and more sustainable in the face of adversity  is the new mandate for our businesses, government, and spiritual institutions.           

Market Commentary for the week of February 5, 2024

Bizarro Jerry

This past week’s hyperbolic market activity surprised no one who thinks that we have entered into a “bizarre” phase…..that “down is up” or “left is right”.  The market and its observers are truly in denial about what they are really seeing.  In fact, for nearly three years most detractors have been predicting permanently entrenched inflation, excessive consumer spending, and indefatigable bullish uptrends in the global stock markets.  Its time to set the critics right.

It is our view that the notion of intractable inflation has been misinterpreted because of the Covid pandemic.  One cannot mistake a robust spending spree brought about by being cooped up in one’s home with a secular, definitional inflation.  The negativists are a bit too enthusiastic in their interpretation of alternative facts.

While a modest rebound in inflation did occur, most of that trend was simply a collective outpouring of spending wrought by a stifling inertia that emanated from a legitimate threat to our mortality….one that killed millions of our friends and neighbors…….and extraordinarily gutted supply chains.  In fact, the true center of gravity of this economy is a remarkably low unemployment rate, giving us ample room to digest the changing landscape without inflicting too much damage.  The most significant statistic emerging from the pandemic is that there are enough jobs to go around for those willing to find them.  Additionally, the personal savings rates created by higher interest rates are serving as an added buffer against the economy falling into a hard landing.

When central banks took immediate action to quell the post-pandemic “revenge” spending spree by raising rates they indicated that temporary, not permanent, remedies were required.  However, we are mindful that the onerous effect of these actions has sent some confidence measures in the wrong direction.  As a result, the markets are gyrating based upon “up is down” philosophies.  When it goes up too much, people start to worry; when rates rise over a two month period, the economy is “failing”; etc.  Underpinning the economy is a set of data hard won before  the pandemic ever existed and which remain solid and stable.

To be sure, earnings have been negatively affected by the tumult in economic statistics.  But the secular shift towards growth and expansion is still strong in a majority of sectors.  We believe that P/E multiples will propel the equity markets higher during this year.  The reason: an increasing percentage of that expansion will come from emerging markets; new industries domestically and abroad (biotech, healthcare, energy, agriculture, and infrastructure); and significant capital reserves that will be plowed back into stocks when rates recede.

Bad-bye?

The primary catalyst for earnings acceleration will be the desire to keep inflation low.  Managing borrowing costs and finding a happy medium in which rates are sufficiently “stimulative” are the keys to building public/private confidence in the investment process and creating entrepreneurial innovation.  The government doesn’t need to be the engine of first resort when aggressive R&D combines with sufficient capital reserves.

Moreover, the seeds of today’s economic growth were planted as far back as the last recession in 2008.  The prolific amounts of capital required to bail out the marketplace then are actually paying off now with greater productivity, modernization of plants, and a new manufacturing spirit.  The painful interruption that was Covid only heightened the passion not to screw up what had been carefully orchestrated a decade earlier.

Without question, there will be turns and bumps in any economic cycle…but not one that should lead optimists towards pessimism nor pessimists to rejoice.  Quantitative science tells us that cycles…ebbs and flows…are normal.  The most important statistic is angle of ascent.  Though shallower and less aggressive than many would like, it remains in a trajectory from “bottom left to top right”.  And right now that gives us enough to work with to create portfolio valuation increases for the foreseeable future.