February 9, 2018

It’s the Market

As the markets move forward the customary refrain of doubt seems to continue to prevail from the point of view of the pundit narrative. Although not without precedent it nonetheless is more about spin than solution. Because of this much of the effort that goes into the management of client money is sometimes lost in the growing value of portfolios when matched by the dwindling confidence in where the value of that growth is coming from. The most frequent conclusion, it’s the market.

It’s only when the broad indexes move sharply lower as they have over the past week that pundits and experts alike appear to come to their senses and accept it is the market and not an accident. Modern economic theory has often suggested that academic intelligence outweighs the importance of discipline and organization in managing assets, or anything else for that matter, I’ve just as often disagreed. The outcome of a portfolios activity is more the sum of its parts than a self-appointed savant’s individual choice of hot stock. The reason is simple.  With the challenges that face the developed global economies, interactive interest rates and rising inflation, political struggles and everything else, including the kitchen sink, nothing is left out of the value of the global markets. One should never take it for granted that just because the markets have gone up doesn’t mean the next move isn’t down. And when the market is down the discipline of an active trader or manager is increased, or should be, with the level of volatility and opportunity. In short the value of management is embedded in the relative value of investing, not with the assumption that when the market rallies all stocks go up, but with discipline of knowing that value, and the risk associated with it, is increased.

Needless to say the outcome of the now well advertised drop in the broad indexes, the Dow -9.1%, the S&P 500 -8.8% and the Nasdaq -8.4% respectively, compares adequately to similar corrections in years past. The challenge has been in the abrupt behavior of the markets suggesting, speculative investment from digital trading of volatility measures or exchange systems. Although there has been no flash crash of the past since a 1,000 point declines in the Dow Jones Index have averaged 4%, not good, but also not the end of the world. In fact the moves in the markets tied in neatly to a jump in interest rates that remained intact when the Fed decided not to increases rates at this week meeting. Likewise the continued rise in manufacturing and earnings point to recent continuation of increases in inflation. Not to mention the recent inflationary decline in the dollar. These point to reasons for this week’s volatility and declines, the difference between grey areas of reason and the opening for real answers.

For the time being the volatility will keep traders and investors on their toes. The potential for opportunities always increases with drop in market valuation. However it’s always important to view value, not in something that is simply cheaper than it was a month ago, but because owning it has a purpose in the asset allocation of the accounts. Namely. For example the need for more defensive levels of risk (i.e. slowing the car down on the highway). This can be accomplished with cash or low volatility, higher income investments, both comforts a variety of concerns in different ways. Comfort being the primary goal in managing expectations, and holding in values until the storm passes and we can speed the car up a little.

So in the end, as the markets move forward and the efforts to explain it become ever more tiresome it’s important to note that the collective wisdom of the financial services industry is a moving target kept in line only through the performance results when the market is up or down. Today’s big swings as a percentage of the whole are more meaningful than the size of the move. This is because against an historical line, the percentage customarily has been the proper point of reference and performance measure.