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.
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