What’s Mine is Yours
We saw extraordinary resilience in the financial averages during the last quarter, particularly in the number of new highs and other advancing issues outpacing analyst’s expectations. In doing so, any uncertainty about trend sustainability and investor confidence was upended. The market’s current plateau has all the doubters in an uncomfortable place….somehow they just love a good “negative” narrative. No question, however, battle lines are being drawn which clearly delineate the bulls from the bears.
The significance of this emotional dichotomy is that action plans, political discourse, and financial reasoning….good or bad….can be now be qualitatively identified.
As we write, earnings modifications are accelerating, acknowledging that January 1 iterations were too timid. While growth might not be extraordinary for all, it clearly gives to those who thought the market would decline in 2024 something else to think about. Our year-end GDP forecast is on the higher end of the spectrum, and more aggressive than we wrote in December. Clearly, most current “revisions” of the forecasts are about upwards surprises, not downwards.
The trouble with the pessimist’s point of view is that they have difficulty separating what’s happening in the economy from what they see around the kitchen table; neither are directly correlated, though. In the past, we coined the term “parallel disconnect” to refer to this oxymoron. But with the enormous amounts of cash held in abeyance by consumers and businesses we believe this time that there is a sufficient safety net of capital that will keep upside performance percolating. It matters not the capitalization or geography of the investment, only that the goal is to build a better planet for its inhabitants. In other words, moderation in one sector will not necessarily disrupt the success of any other. There are simply too many things to get done that we should expect….or encourage….a global recession. An old sports maxim states that “you can’t win a game in the first quarter but you sure can lose it.”
Strategy
In many ways what we’re discussing in this missive is how straightforward it is to win (or lose) the public’s trust when it comes to finance, politics, and morality. It is fashionable to tear down the institutions when it seems they don’t agree with our point of view. But it is particularly vexing when those same megaliths demonstrate a lack of concern for us, their consumers. Take, for instance, an insurance company when a weather disaster strikes. We expect the “good hands” to be there when we need them to lend financial, technical, and emotional assistance. When they fail to deliver relief, monetary or otherwise, in a timely manner it’s upsetting, of course. Many businesses that have a utilitarian function are sometimes exposed to be just like any other business….a vehicle for creating profitability for their stakeholders. Look, we have no qualms with corporate profitability, but the crux of this hypothesis is that the common good might sometimes be impeded by a fabricated expectation of service from the companies that ask us to call upon them when needed. A case of profit making for the sake of profitability versus “righteous” benefit and good profits.
Toymakers, automobile manufacturers, public utilities, financial institutions, hospitals and other enterprises that provide a “public service” need to keep their pledge and realize that their inordinate profits are a by-product of creating superior provision and not just their “right” to collect our premiums. Think about it in the abstract: any company could become profitable if it succeeds at giving the public what it wants and needs, what it pays for, and if done honestly and responsibly.
Without question, the post-Covid economy has given businesses an opportunity to rearrange their operating models to conform more closely to a changing public square. Unfortunately, some of the realignments have uncovered a bewildered board of directors, intent more aggressively on protecting what shrinking margins they still profess to “own”, all at the expense of their consumers and the public perception of their moribund business model. In some cases it means layoffs and share buybacks which leads to an even greater sense of mistrust in the public domain. Trying to manufacture profits through alchemy, misdirection, and machination is the fastest way to oblivion. Dishonesty, deceit, and unprofessionalism create the very narrow-mindedness these organizations are trying to avoid in the first place. Here again, building a better mousetrap has fallen victim to greed and self-interest.
And, no doubt, consumers have gotten wise to this kind of corporate chicanery and have become more discerning with their purchasing power. When large banks and brokerages repurpose old products and marketing schemes, or broadcast “feel good” television and radio commercials of seniors walking on a beach, some in the public see through those efforts as simple-minded attempts to part them from their money. As each dollar becomes more precious, the community is demanding ethics changes from those to whom they give agency and accountability for public service on their behalf.
One of those public services is water. It is not just a commodity or utility, it is a necessity for life. My investment units have actively been engaged in this space for nearly four decades creating model portfolios and investment strategies related to solving (and, yes, profiting from) these complex issues and now we finally see the media earnestly allocating more coverage to socially responsible causes, perhaps engendered by climate change, population migration, or military conflict around the globe. The allocation of scarce resources, like water and food, demonstrates a systemic inequity in how depleting natural resources are obtained and distributed. Much of the worlds’ sewer systems are antiquated and crumbling. Billions of dollars will be required to remediate water-related projects. Similarly, the retrieval and creation of arable farmland is an arduous task for future generations around the globe. New infrastructure creation linked to recovery, purification, and delivery of potable water represents one of the most important financial (and moral) opportunities of this century. Hunger and drought are as important to eradicate as is hatred and dislocation.
The price for waiting on these, and other, social issues will only increase over time. For example, desalinization of ocean water might be expensive but it is the most effective way to create useable drinking water from an unlimited source. Water is one of the few commodities on our planet that is either directly or indirectly linked to the production of nearly all products. Put another way, without it the global economy would be rendered purposeless and impotent.
Because our industrial, commercial, and capital base depends on the viability (and enthusiasm) of its citizens, there really is no greater mission than to (1) acknowledge and appreciate one’s personal largesse and (2) to look out for the well-being of our neighbors.
Conclusion
After a strong start to the year we predict the economic momentum continues. Earnings were better than expected in many categories while the Fed continues to signal a slow and steady hand on interest rate policy. From a macro perspective we are early in the post-Covid recovery game. It is so important to look at the forest, not the trees……macro, not the micro. Technology, Non-Cyclicals, Commodities, and Financials should perform well in this upcoming quarter. The market will never be “happy” with its surroundings; that’s the nature of the beast. But managing risk and employing prudent asset allocation weightings is my job, and not for the faint of heart, anyway.
The forces exerted upon the financial markets are prolific. At each day’s close someone is either happy or sad. Talking heads in the media or at political rallies might try to assuage our anxieties or color our opinions, but each of us innately knows our own boundaries and capacity for risk and reason. Fear is not the problem. The real problem is when we are misled or lied to.
As sure as the market surge is real, there will come an inevitable parabolic reversion back to the mean as was occurring in the final weeks of this past quarter and, thus, our enthusiasm and patience will be tested anew. And when that happens there had better be honest brokers and businesses quickly stepping up to quell our fears and get us back into the game. Inertia is not a choice. We have to accept our shared responsibility to each other and leave a better place to our heirs. No one really “owns” their time here on this planet. They only serve as humble caretakers of the rich bounty it provides, nurturing it for those who follow.
Suggested Balanced Account Asset Allocation, Q2 2024
Equities: 56%
Fixed Income: 40%
Cash: 4%
Disclaimer
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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