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.
Circumstance
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.
Outcome
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.
Opinion
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.
