Happy days.
Recent history has shown us that when investors feel “prosperous” their spending habits become more robust. Sometimes they even throw caution to the wind and splurge on discretionary purchases they previously sought to avoid or postpone. Such is the nature of a rapidly changing landscape that what previously had been a vulnerability now becomes a necessity. The impact of financial decision-making can have a manic effect upon virtually any part of the world. This is why crises become epidemics, and cures become panacea.
The recent market calamity prompted one of this generations most prolific negative responses, bringing back memories of the 1929 crash. The most worrisome aspect of the current “magna-response” is that unlike a generational, tectonic fundamental response to what ailed us, the environment was ripe for one-off cherry picking of depressed stocks (and sectors) so that the catalyst for systemic change was never required. If we only had the patience, and the will, to address some of the broader reasons for the selloff in the first place…
By comparison, the market today is poised to run up against valuation expansion in a dramatic way. Though we may not realize it, this is not a “golden age” for stocks. To be sure, there is a multiplicity of opportunity in a variety of sectors and global regions, the fruition of which might take decades. But, unfortunately, no one wants to think about generational transpositions in this minute-by-minute society. So the ambiguities of long-term investing morph into a “what have you got today?” wellspring of uninformed choices. Pretty soon, portfolios get locked-in and illiquid.
All-in.
Is the market discounting or pricing-in the real landscape of today’s fundamentals? Well, the answer obviously depends upon your discipline, frame-of-reference, and time horizon. In an all-or-none world the market appears to be well balanced, recognizing an appropriate “upside bias” towards owning stocks and bonds.
On the other hand, a more likely scenario would say that manias are not good, up or down, and that a gap between prices and relative strength ratios seems to be widening as prices, and optimism, race skyward. If it always takes a “worse-case” scenario to define a potential market recalibration, one only has to look at the dot.com euphoria of a decade ago to refute that point.
Profit by accident?
The current surprise is that if fundamentals and prices are alright, why do so many households and small businesses still struggle to increase margins? Is it only for the megaliths to succeed, or can the crescendo of upside enthusiasm effectively spill over to a broader capital base?
Remember, the averages were down over 40 percent. A full rebound only brings us back to “square one” as far as valuations are concerned. Consider that the Dow and S&P new highs were also within reach 5 years ago.
There are domestic and fundamental issues left to address that dramatically impact upon near-term concerns about whether we can sustain current equity prices and the mindset which drives them. Amid hopes that this time is “for real,” take note that solutions don’t happen by accident, nor do market troughs. The predominant trend always recedes back to the mean, just as market disasters always capitulate upwards. Today, it seems, is a case of forgetting the root cause of the decline to the exclusion of a “feel-good” story.
This suggests that the current environment is not one which in and of itself could spark a recession or a turbulent reversal in the financial markets. Rather, it contains the elements which, if left unattended, could produce an unexpected consequence of our boldness and impose a de-stimulative impact upon equity valuations. The data are not enough to cause a global slowdown, but they are, at their core, a source of consternation which would make today’s new highs a possible resistance point for the future.
Scotty C. George
(212) 624-1147
The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and it accuracy cannot be guaranteed. It is intended for private informational purposes only. Any opinions expressed are subject to change without notice. Du Pasquier Asset Management and its affiliated companies and/or individuals may from time to time own or have positions in the securities or contrary to the recommendation discussed herein.
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