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……