Hard to hold.
After having had a tremendous first half of the year, what direction might the market take into the next few quarters? On the one hand, trend analysis has indeed turned “positive” and would suggest that the throttle is in full “go” mode. However, we know from historical and economic analysis that markets cannot sustain linear acceleration indefinitely, and that even the most robust trend is susceptible either to linear reversion or cyclical unraveling. Those of us old enough to remember also know that “black hole” events like October 1987 or flash trading collapses can unwind not only valuation but enthusiasm as well.
Much of the current rally, I believe, is driven by two factors. First, the economy and valuations had become so depressed as a result of the previous decade’s recession that a response was not only warranted, but likely. Prices became so attractive, and relative strength integers had dipped so low, that those with the right mental, and fiscal, makeup were seduced to come back in. Secondly, and working in concert with the above, the cost of funds had become so incredibly attractive, in large part due to machinations by government treasuries, that speculation became more “valuable” than simply holding on to cash.
But news that the Federal Reserve might reverse its policy of holding down rates caused a near calamitous response in the latter half of last quarter that the vulnerability and reliability of fundamental economic data was now being called into question. In other words, a “value-driven” rally, unsupported by consumer demand, manufacturing, and consumer confidence is a house of cards ready to collapse.
The factor which I hold most important to equity and economic vibrance is earnings, household and corporate, and today the evidence cannot conclude decisively that we are gaining in savings and sustainability. Companies are indeed improving their earnings, but are doing so through accounting and manipulation moreso than growing demand for, and higher revenue from their product offerings. Perhaps demand will pick up in the coming months, but evidence that it can sustain this equity rally beyond the speculators is still not confirmed.
Easy to lose.
The rally can sustain, but the speed at which it has been growing I might call into question.
While there has been economic improvement over the past year, the big question that might impede its pace is about the direction of interest rates. Globally, nations must begin a conversion from austerity and building “profits” to loosening the reins and allowing economic demand to lead. There is no story to be told if enthusiasm doesn’t transcend from corporate balance sheets to the consumer’s living room. Demand (consumption) drives the engine, and today’s low savings and low interest rates inhibit that engine from revving up. If rates don’t rise the trend for market performance will lapse into just another speculator’s game of cat and mouse.
Liquidity and savings are soft, probably leading to a slower market for the second half of the year. While there is no other game to play except stocks, that doesn’t always lead to an enthusiastic result. We should not always evaluate things based upon a market outcome, but upon the right things being done to sustain people’s hopes and expectations about living a prosperous and meaningful life.
So, while I hope for the Fed to allow rates to drift upwards, I’m inclined to think their hand is firmly on the rudder for now. Their margin for error is tighter in the short run as a result. The window for stock speculation is still open. Secular and demographic themes lay secondary to short-term cycles. The “responsible” thing is not always the first thought for those looking to score big at the table. But a durational approach most usually wins, thereby strengthening the notion that asset allocation isolates gains, and prevents losses, more effectively than jumping from theme to theme indiscriminately.
The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. This report is not to be construed as an offer to sell or solicitation to buy any security. It is intended for private information 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 recommendations discussed herein.
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