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.
