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……
No comments:
Post a Comment