Quarterly Commentary

Markets

We find ourselves on the cusp of profound changes to the financial landscape. The balance of power is shifting toward the East in areas like banking, technology, and military strength. These shifts are being felt around the world in commodities and energy price shifts. The US dollar is being hit hard, while bonds (debt) are proving to be somewhat de-facto currency ammunition by our adversaries. Our “lenders” wield significant influence over our future. Those assets which fare relatively well in good times and bad are harder to uncover. The bubble of enthusiasm has receded and the world is anticipating a difficult period of growth. Defensive sectors such as commodities and short-term bonds are seemingly safer bets for the immediate future.

Today, there is apprehension regarding inflation and indebtedness. For those of us who remember, however, there were similar fearsin the 1970’s and 1980’s. And yet, following those decades we began the longest and most diverse bull marketsin history. The mega-trend of that period was the growth of the “middle-class” economy, creating the largest and broadest wealth-building period in the globe’s economy to date. Financial booms and busts are always recurring….there is nothing “new” about that. There are forces which propel asset bubbles, and then there are those which cause reversions to the mean….monetary policy, money supply, expectations, and psychology, for example.

The Federal Reserve and other global central bankers had also been trying (post-Covid) to stimulate growth and build liquidity, which became the precondition for the asset bubbles we describe above. But try as we might to battle them, market capitulations and cyclical rhythms are a part of the natural economic ecosystem. These pattens oftentimes provide clues as to what themes lie ahead.

To wit, in order for inflation to flourish there must be a climate of excess demand accommodated by “easy” money supply. Current anecdotal facts show, however, that the pent-up demand immediately following the pandemic has mostly been appeased. Public and private sector spending has been muted in recent months as a result of monetary biases. We believe that the preoccupation with systemic inflation is transitory, if not transitional, and has already shown a likelihood of diminishing.

Higher personal and corporate savings rates, encouraged by the Fed raising rates, will be a net positive for the domestic economy. We view this surplus of cash as a potential boon for equities as well as a balance point against portfolio instability in the coming year.

Equity price volatility, for example, seems more capricious than ever. Technology has certainly sped up the rate at which progress, research, and analysis is developing. But we’re also dealing with a communications accelerant in the internet. What used to be headlines in tomorrow’s newspaper has become instantaneous chatter throughout the network. Bull markets can be created…or eviscerated….in seconds, not weeks or months. There is no time to create a consensus about data, it just happens in an instant. One also has to worry about how conflict resolution will look in the future, as we see examples of terror, hatred, and war in Ukraine and the Middle East exacerbated by internet memes and horrific cell phone images.

Our best advice to clients as we begin a new year is not to engage in hourly market watching but to commit to a strategy that is inherently “other-directed”…to invest in that which limits the power one gives to news coverage and focuses instead upon using capital to build profits from human and cultural problem solving.

Strategy

One of the ways to begin the year effectively is to establish a discipline for managing both risk and resources. Too often, investors benchmark their expectations against an elusive “standard” found in books, television, or the internet. Every financial services firm has product that promises a return consistent with an “average” over the years. Yet, we know that during Covid…and other crises ….you can throw away all the standards, all the averages. During the pandemic, we were focused on preserving wealth, not building it.

Constrained by unrealistic expectations, many are doomed to fail before they begin any investment program. This author believes that there is no “normal” to investing……. only a stability of methodology which hopefully gets one to their desired objectives.

Suppose, for example, you uncover a “hot” manager or strategy that captures the market’s imagination? How, then, do you quantify the duration of success for that strategy? Might one imply that the strategy continues to succeed even as the conditions for its success change? Shooting at moving targets is difficult under the best of circumstances; driving your net worth under those pretenses might not be worth the gamble. I believe that all disciplines are cyclical. Each can be measured for the durability and probability of managing risk. For the most part, protecting against drawdown is equally as important as predicting upside potential….particularly for the affluent who have much more to lose if wrong. The challenge, of course, is to reign in expectations consistent with the real momentum and longer term characteristics of macro events. Micro might work for traders and benchmark followers, but discipline and process identifies winners from gamblers.

Additionally, asset diversification enhances the probability of capital gains. While it is always nice to have the one-off “home run”, strategies that instead concentrate on trend duration reduce risk and increase portfolio alpha over significant periods of time. In other words, juxtaposed against index benchmarking and implied exogenous risks, being nimble with one’s allocation while still maintaining strict adherence to quantifiable data more often confirms the outcome you desire from your portfolio.

As mentioned earlier, there are many theories about the market’s pending downfall. Indeed, making it from quarter to quarter, paycheck to paycheck is too often the only investment strategy. But portfolio construction must take into consideration those things which precipitate quality returns for the long-term, such as profitability, price sustainability, relative strength, and sector relevance. Our recent executions for clients were to magnify the compelling case for allocating cash into short term bonds, thanks to the historical increase in interest rates during the last two years. We haven’t seen this significant a hedge against equity risk/volatility in over a decade. Finally, the relationship between equity and fixed income allocations is being normalized.

In our equity portfolios we are seizing upon capital gains potential in biotech, water purification and agriculture, telecommunications, alternative energy, emerging markets, and infrastructure. We view the socially responsible aspect of portfolio construction as critical during the next decade and beyond. Despite the potential for volatility early this year because of Presidential politics, our eyes are firmly upon the long term efficiencies of the capital markets.

Conclusion

Clients must realize that it is always hypothesis and speculation to try to forecast what the markets and/or the economy will or won’t do. In our case though, we utilize proprietary data analytics with a “quantitative” orientation to combine thematic observation with cycle duration measures to arrive at specific investment models. Of course, markets either unfold as one expects, or exogenous events intervene to muddy the waters. Nevertheless, our themes and allocations have been spot on for more than four decades.

In that vein, we see equity prices forging higher for the coming year supported by modestly declining interest rates and a global recovery from the backdrop of pandemic and confusion. In other words, the cyclical…and secular….bullish bias remains. The view from 30,000 feet is of a planet that needs to get its house in order…from climate, to security, to economics, poverty, hunger, diseases, and hatred. If we are correct, this year should see a sequence of positive processes….both political and economic… designed to eradicate the worst, accelerate the best amongst us.

It is always more difficult to move forward against a headwind. But being pessimistic is of no benefit, either. Anyone can make money when the markets are doing well. We believe that obstacles can be overcome with prudent asset allocation models. Therefore, our strategic conclusion is to widen the aperture of perception and utilize investment capital to remedy a fragile earth.

Suggested Balanced Account Asset Allocation Q1, 2024
Equities: 51%
Fixed Income: 40 %
Cash: 9%

Arlington Econometrics is a quantitative market tool. Utilizing proprietary algorithmic equations, AE offers solutions for market-timing, asset allocation, and macro economic analysis. Using historical time-series measurements, Arlington Econometrics optimizes the analytical process and forecasting coefficients to make economic forecasting more objective.
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. Alexander Capital 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. Neither Alexander Capital, LP nor any of its affiliates (collectively, “Alexander Capital, LP”) is responsible for any recommendation, solicitation, offer or agreement or any information about any transaction, security, customer account, or account activity in this communication.

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