Hollow, or real?
Some weekly commentaries are chock full of information, editorial content, market swings, economic data, and the like. Others, like today, reveal nothing magical about the preceding week or the outlook ahead.
Which makes this a rather unique and eventful missive, itself.
As we look at market activity during the first 10 months of the year, my perspective is shaped by the fact that despite expected, and inevitable, cyclical drawdowns, the image of this year is a near-linear upswing in equity valuations. Whether caused by specific reactions to economic events, or simply a release of pent-up expectations, the sheer magnitude of the averages’ percentage increase is a one-off, and untraditional, event.
In fact, extremes like this when seen as “downside events” would make most investors run for the hills. In like fashion, many are chasing after the train has well left the station.
This is not to diminish the impact of radical global economic shifts which have neutralized a lot of the bad news of the previous decade. Rather, we must make note of the rules which govern market statistics and analysis to point out that today’s stochastic (relative strength) integers infer that while there is, indeed, a new flight to quality and equity expansion, the trend lines which support that euphoria are unlikely to sustain such a one time magnitudinal surge.
We want to believe that “new high” trends will persist, we really do. But we know as investors, statisticians, and citizens that nothing goes straight up…forever. We are in a stock pickers paradise, and loathe to see a bigger picture.
Yes, go.
While there is no denying a sea-change in expectations about portfolio performance, let’s drill down from an across-the-board approach to investing to explore some of the specific sources of global equity expansion.
It begins with the demise of the credit markets. Consistently, the lack of a suitable alternative parking place for our investment funds has led to a default bonanza for equities. The long-term is always good for stocks, but in this instance there was a benevolent confluence of credit (interest rate) erosion and a bear market in stocks brought on by a myriad number of systemic economic failures, such as overspending and excessive leverage.
This put us in a distinct opportunity to capitalize upon the same type of negative stochastic integers, then, as are currently being touted as positive, today. On either end of a probability scale, the excesses nearly always lead to a manic reversal in performance.
If pressed, how many of you would bet on today being the optimal entry point for stocks if you had new money, versus a starting point four years ago? The irony is, and remains however, that there are no other alternatives for capital investment. We have either turned a major (psychological) corner, or we are destined to expire today’s relative strength message.
In a market where any news precipitates upside or downside excitement, every rally becomes a seduction song that cannot be ignored. In a week such as last, we should not conflate the absence of bad news as a surrogate for good news.
In the meantime, we continue to stay “fully invested”, which for our balanced accounts means at least 30% in cash reserves. It is still possible to outperform the benchmarks, near term and long, by prudently selecting solid earnings and long duration price trends, without going all-in or becoming inexplicably manic.
Knowing what we do today, opportunity is capricious and not formulaic. A restrained week, indeed.
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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