Nice Guys Finish Last

 The Fed raised interest rates yesterday and I’ve made the statement over the past week, that the Capital Markets would respond better if the Fed were too aggressive than if they weren’t aggressive enough. Well, the Fed, as expected, raised rates by .75%, and the market response could best be described as ambivalent. Then Fed Chairman Powell took the stand to take questions and suggested a more aggressive stand as the data comes in to defend the move. This seemed at odds with his statements that the economy was strong and his statement that the goal of the Fed is strong employment. Unfortunately, strong employment is exactly what helped create too much money now faced with too little to buy, which is by definition, inflation. Does Powell mean any of it? It doesn’t matter. As once observed, inflation doesn’t like nice guys, so yesterday Powell tried to show us his tough side. But was it enough?

On the issue of economic growth, strong is not what I’ve been commenting on for at last four months. First of all, one needn’t look far to see that the first quarter of 2022, real GDP came in at an annual rate of negative 1.5%. During the present quarter the ISM Non-Manufacturing index slowed to 55.9, above or below 50 implies expanding or contracting, New Single-Family Home Sales dropped -16.6% in April, Retail Sales Declined- 0.3% in May and as has been typical of the past three months, manufacturing activity has improved since the first quarter, adding to the economic uncertainty that, in my opinion, may be promising to some, but is not a strong economy.

One area that has been resistant to economic moderation has been job growth. Since the challenges faced by the pandemic the vast number of companies that are committed to the new approach, namely providing jobs and community support, and showing it with a hike in wages that has exceeded 5.5% over the past year. However, companies are facing two historical issues right now. Consumer reticence is real, institutional retail entities have found themselves with too much inventory and declining consumer interest. With the need to address these issues on the balance sheet (i.e., bring operating expenses down) the first place most companies will look at are employment costs, which are showing up in casually announced layoffs and hiring freezes. Personally, I like the current pace of executive retirements taking place in the technology sector. Afterall, when Sheryl Sandburg decided to leave Meta (META) her income alone is probably enough to save a few thousand blue collar jobs. 

The handful of times investor and market activity was so volatile, the word “conundrum” became the customary descriptive of the narrative. We still have supply chain disruptions from China, War that is fading from the media, and a dysfunctional OPEC that are all uncertainties on steroids, with little sign of being seriously addressed. There is no denying that even when inflation data peaks, tangible inflation has arrived and much of it will stick around. Only a meaningful economic slowdown, call it a recession will have the necessary influence on consumer activity. This may be because most people are smarter than our government experts take for granted. For now, the markets are very oversold and, in my opinion, it's not a time to sell, but any buying still requires careful consideration. 

Corrections are not All Bad

  The markets are entering the new year with stories galore and little to back them up. Inflation continues to be the primary topic of conversation, including the projected responses from the Federal Reserve Board. But, supply chains are starting to ease, along with the current variant of covid-lite both have taken, in my opinion, some of the punch away from the inflation argument. So, what’s fueling inflation?

    While the increase in the demand for commodities coming from both industrial the technology sectors is real as expressed in the demand for infrastructure and semiconductor stocks, even that will eventually ease. The Employment Cost Index, which tracks wage compensation inflation, has been steadily rising to levels not seen since before the financial crisis. More money earned, more money to spend. And that spending as a Percentage of GDP, has been steadily rising to the highest level, 69% in 2021, in over 70yrs. Add to that, supply chain challenges to demand, and it’s easy to understand where some concern is coming from.

    So, in my opinion, the more aggressive tone from the Federal Reserve regarding interest rate hikes as the weapon of choice to fight inflation is one of genuine concern, with one caveat. The concern comes from the historical precedent that began in the 1980’s when Paul Volker, the then current Fed Chairman, raised interest rates in order to slow the economy and thereby curb inflation. Essentially, people spend much less during a recession. However, it was not as smooth as expected as interest rates needed to rise not by a quarter (.25%) percent four times as projected in 2022, but by over 5% in 1980 alone taking the 10yr Treasury to over 15%, currently 1.71%. Hence the fears that are infecting the markets.

    So, the recent declines in the broad indexes are a product of both those aforementioned fears and a condition that was by definition overbought. But the overbought condition is beginning to ease with each sharp decline and it’s especially the growth sectors, such as Consumer Discretion and Technology, that are taking the brunt both fundamentally and technically. In my opinion, the current volatility is buffering the models, with both cash and some favorable sector exposure in addition to the less favorable. Overall, the diversification is keeping the performance in line with benchmark targets and for now, only patience and some opportunity buying makes more sense than listening to the self-proclaimed experts. 

    My reason is simple, if the markets correct enough, it would be the first time since the beginning of the pandemic, and many of the Pindudes, namely the newcomers and other recently brainwashed speculators who got very lucky in the thick of the pandemic and its variants, will likely lose some enthusiasm and two things may happen, they will have less discretionary capital to spend, good for inflation, and they may actually look for a real job, also good for inflation. In the meantime, when the market goes to oversold, Algochums and Hedgefiends will buy, Maybe it’s not the best road to get there, but an outcome that would make a recession, in my opinion and I hope the Fed’s opinion, an unnecessary option.   

Decisions Matter

 The person who claims to be indecisive is by definition decisive

-Me

When markets collapse or grow with irrational exuberance the narrative rarely falls on the importance of making a decision on both occasions. However, the narrative often ignores the scope of emotion that accompanies both circumstances if not outright distract from the question at hand. The unintended consequence of this condition is to lose perspective trying to understand the day to day descriptive. At its worst it also challenges your faith in what you thought you always understood. This is where, in my opinion, decisions matter. Why not be excited when markets go down and opportunities abound? Likewise, why not become skeptical when markets rise irrationally, and opportunities disappear? Every decision carries the risk of being wrong, allowing for the probability of an unexpected outcome of an investment whose validity can often come into question is where sometimes the best decision to make is no decision at all.

Markets

The broad indexes all finished the week in positive territory, supporting last week’s closing technical condition suggesting the market, as represented by the S&P 500, was overbought. Subsequently, it’s still overbought, and if the markets continue to trade higher the move will stretch some of those technicals just in time for the election. In the meantime, given the surge in GDP in the second quarter, reversing the first quarter drop, the expectations for earnings to be released in the next few weeks appear optimistic. It would be unsurprising that would result in a relatively flat market which should prevail until any earnings surprises pick up the volatility. Should that occur, while I’m currently looking for opportunities to add to exiting holdings, new ideas could always come along.

Economics

Since my last commentary, the economic scenario has shown continued lopsided growth. The consumer is strong, but not as strong, job growth is healthy, but there are still 10.018 million people continuing to claim jobless benefits. There is no arguing the condition of the economy is still controlled by the pandemic and the legislation that aims to address it, in some cases, irrespective of the economic outcome. But it’s hard to deny that spending is reasonably healthy as indicated in today’s Retail Sales data that saw a better than expected 1.9% increase. Much of the consumption included categories related to the booming housing sector along with sales at home improvement and furniture stores, both increasing last month as well. On the inflation front the Producer Price Index rose .4%, higher than expected.  Food prices rose 1.2% in September, while energy prices fell 0.3%. The Consumer Price Index (CPI) rose 0.2% in September, matching consensus. In both cases inflation is rising, along with steady growth in consumer demands, however, remains below the Federal Reserve’s goal of 2%, for now.

External Events

Bragging is in and I find it quite curious how many of my industries most notable pundits are sounding more and more like Pindudes, every day. The casual recommendation of stocks that appear more in line with short term jumps are the result of what’s referred to as operational thinking as opposed to strategic thinking. The process is fine for those with an outlook for the present, however I prefer to focus on the ends, as distinct from the means. Namely, I make an investment with the aim to capitalize on future outcomes while buffering short term distractions. In my opinion, investment choices can profit in either outcome is the strategic challenge the investor, not traders, focus on. I bring this up, because these days to simply speculate on a company that is consistent with any economic expansion that follows historical norms is ignoring the impact of  the pandemic and the current political climate will have an impact on how that expansion will unfold, which still remains to be a bumpy ride toward a cloudy horizon. And if a good idea doesn’t come along, cash, is nothing to brag about, but it’s always a good strategy too.

They’re Back!

The corona virus and a generous fed are back. But as I suggested last week in my impatience with the sterling rally in companies without revenue sources and damaged balances sheets, the culprits were the usual Algochums, but another joined the parade, those who play the market as a game to make a quick buck, I call them Pinplayers , and they’re back!

Last week when I wrote about the aggressive purchases of stocks that for all fundamental reason should not have been bought, I was referring to the cruise lines and airlines having been decimated by the pandemic and have had to borrow aggressively from the government but more importantly from the bond market, taking on enormous amounts of debt that only a resurgence in riders has little chance of recouping anything near their financial condition before the pandemic. This in large part is why the 30 stocks in the Dow Jones Industrial Index went up so much recently and why it came down so much today. But just as in other market corrections the same incentives emerge and ETF’s are the lowest hanging fruit, hence all stocks appear to move lower with further help from the Pinplayers and Hedge Funds. The latter which I believe are the elitist of Pinplayers who have stood out this year by ranting to the media that the world was ending. It didn’t’, they were wrong, and the markets have an angry feel to them.

My reasons are straight forward. The markets have been overbought for a few weeks. This shouldn’t come as a surprise to anyone who has read the news or have skin in the game themselves. These days the use of countless crystal balls to suggest this is or isn’t the case are all useless compared to a simple relative strength indicator. Likewise, the uncertainty that has entered the market is still considered a premium in so much as there are assumptions that should be taken in stride. First, Fed Chairman Powell said yesterday that the Fed would unlikely raise rates before 2023. The press took this as scary; I take it to mean they’re going to stay out of the way and let the bond markets do its own thing, which it always does anyway. There is also growing talk of the second wave of the pandemic. This is expected, and since the protests were occurring very little was said about the virus, but few were lost on the masses of people, shoulder to shoulder, and many not wearing masks. Does this mean something worse than the first wave? In my opinion I don’t know, but what I do know is everything from wearing masks to social distancing has become a near commonality for millions of people, testing is far more accessible, and as of today three pharmaceutical companies are cautiously hopeful for  a vaccine by the first quarter of 2021. All three are signs of preparedness and a well-informed community that didn’t exist the first time around and could provide a buffer the second time around.

And in the end the markets are going to predict what will happen in the future. The reopening of the economy has been cautious and carefully executed. Companies such as Starbucks (SBUX) have changed the rules of business themselves and while it’s going to take some time to get to normal there’s cash for opportunities and Treasuries to buffer some of the volatility. And the companies that have weathered the real problems in the economy such as Amazon (AMZN) will continue to serve a diversified portfolio well when corrections such as we’re experiencing come to an end. When that happens is an unknown, but when it does, they’ll be back, and so will we.

Sooner or Later

Total non-farm payroll employment fell by 701,000 in March, and the unemployment rate rose to 4.4 percent. Employment in leisure and hospitality fell sharply, with smaller job losses in other industries.

BUREAU OF LABOR STATISTICS

The Unemployment data was released today, and it was bad. Not only because it showed a recessionary decline, but because every estimate I had access to was painfully off, coming in at only -100K and a pickup of the unemployment rate from 3.5 to 3.8%. This is worth noting in that this week has seen an enormous rise in worst case narratives from both public and private entities. Along with today’s unexpected employment data the overall picture is moving quickly from under control to open ended. In my opinion I think this is both intentional and useful. Intentional because just as the US is under strict behavior guidelines for the private sector, so too are much of the western democracies. Now the same worst case scenarios are coming from the governments harsh predictions resulting from the pandemic.  With that, the unemployment number for April, which could likely be overestimated, could move the markets into a direction that when everyone is looking for the worst, small positive surprises count.

The Markets

The declines for the broad markets this week were more on the back of expectations of the upcoming unemployment data as well as realization beyond those expectations. However, what seemed to capture the narrative was talk about a potential meeting of energy company executives at the White House and unconfirmed conversations between the US, Russia and Saudi Arabia. The outcome was a vigorous move higher in the price of oil that has seen  over a 60% decline in it’s price since the beginning of the pandemic crisis, helped by Saudi and Russian fighting over who could flood the globe with more oil at a time when usage sharply declined. For now, markets could experience less volatility as the typical investment posture at the beginning of a quarter is to wait it out for the string of economic releases that should start to speed up in the second week of April, just in time for more bad news.

The Economy

The challenging mix of results overwhelmed by the unemployment data has kept the markets in an uncertain state. Starting with the PMI (Purchasing Managers Index) for the manufacturing sector, came in at 49.1, unsurprising that much of the economy for production of durables and general products has had mixed data for some time. As a smaller piece of GDP, the companies that include energy are expected some recovery, but how much is less important than those sectors that serve the consumer. Those sectors saw the PMI non-manufacturing data come out at 52.5. This was totally underestimated by economists who expected it to be around 40, far below the level of expansion, which is 50. The number was also at odds with the services industry which by most measure, especially today’s unemployment data, was a huge casualty of the corporate shutdowns. Further uncertainty is that global data isn’t as synchronized as one might expect, or exponentially harsher for countries like Italy than Germany, consider the former has had a much harder time managing the pandemic. This highlights those countries with the most vigorous economies coming into the crises had much more to give up. Perhaps except for China, I’ll leave it there.

External Events

The commotion over oil is curious at best. For some of us who remember the rise in the price of oil to $100 early in the financial crisis, the broad understanding was that energy at that price would cause a recession based on consumer demand for gasoline, heating oil and natural gas. Flash forward to the recent media narrative that suggested oils price decline contributed to the decline in the broad indexes. First, energy is roughly 8.2% of the global economy and 5.8% of the US economy and shrinking. That would suggest energy should have limited effect on the capital markets, with the possible exception of its debt, and therefore this week’s positive news on the commodity couldn’t stop the market declines and, in my opinion, won’t. Further legislation is being hammered out in Washington that includes infrastructure and further aid to small business. Apart from some ideological additions the outcome should amount to over a trillion dollars. But there you have it, this week’s unemployment data was bad, April should be worse and It’s not like the country has been sitting idle, contrary to opposing political opinion. Companies have ramped up the production of necessary masks, gowns, ventilators and respirators, pharmaceutical companies are coming with faster testing materials, potential treatments and trial of possible immunizations. And the preparations made by the public are impressive with growing discipline. Consider that with expectations of the worst and I’m looking for the glimmer of light, with cash in hand. Let’s hope sooner rather than later.

Two Steps Forward, One Step Back

“There is nothing more deceptive than an obvious fact” – Sherlock Holmes

Coming up with a way to better frame the current state of the markets as an update is becoming very tiresome.  With the near passionate frenzy the media exhibits in the face of declining stock prices more and more often the reasons have more to do with consumer interests than genuinely informative financial news. Today for example I listed to hours on end, not about trade issues with  China, not about economic moderation, not about changing attitude to tax policy, but nonstop conversation on the accusation of bribery from Jeff Bezos to The National Enquirer* over the threat of releasing salacious photos belonging to the Amazon founder. By the way, Amazon (AMZN) is a long term buy and in my opinion among the most strategically original, efficiently managed and gloriously disruptive companies introduced to the world through the technology revolution. So what else looks interesting?

The Economy

It seems too easy to point to the strong employment data last week and say the economy is strong. But with the recent declines in US manufacturing and housing data and the more recent highlighting of economic moderation in China and widening parts of Europe, it’s important to remain focused. In part, because some of the weak data can be directly attributed to trade issues and housing can be traced to the recent increase in interest rates that slowed mortgage applications and loans for building permits.

In short, there is a lot happening that could turn on a dime, for example a trade deal could be made. China has also been injecting their own brand of stimulus in their economy, and Europe needs a stronger China in its economic balance. In the US, the consumer is alive and consuming and for now we are all waiting for the natural, if not historic, outcome of inflation from over spending and keeping in mind that Inflation is an indication of a healthy economy, too much is not.

The Markets

January through February is the time when corporate earnings are released. The companies represented in the S&P 500 and the NASDAQ finished the year on a positive note even when their respective stocks did not. I take it in stride as many of the more high profile analysts happily reduced their forecasts during the year end decline, so my expectations for a good earnings season were intact. But I’m more interested in the guidance offered by executives that gives a better picture of the rest of the year which can turn the price of an individual stock around in a second. Subsequently much of the narrative was constructive, and overall investors found a reason to take the opportunity to add risk. Now, after the first month of trading in the New Year, the markets are behaving a bit unruly. Once again however the increases in the value of the indexes returns us to the two steps forward one step back scenario.

External Events

Once the government was opened it was inevitable that the contentious debate would come back in mid-February. This coupled with enormous auctions taking place to refund the countries debt obligations highlights the growing concern why there is so little conversation about the current account deficit. On top of that the meetings with China’s trade team are neither good nor bad, and that creates an air of concern. Only the Fed reiterating their desire to pause raising rates and continue to watch the incoming data has been met with relief, but even that is being met with rising concern. And last but not least is the growing cadre of politicians priming for the 2020 elections. Not necessarily with any impact on the market, yet, but the kind of distraction that can be effective in different ways. In my opinion that more likely way is going to be favorable to the markets, because markets lead the way and the economy follows. For now unless one believes that a recession is around the corner, the economy has room to look better.

Breadth of Volatility

This may sound odd, but a very reliable technical observation that has presented itself to me over the many years I’ve been watching numbers flashing on a screen concerns what I refer to as the breadth of volatility. This refers to the space that occurs when markets spike up and spike down. And because as the measure of that breadth increasingly widens, so too do the investment opportunities. This is as opposed to the speculative opportunities that have been major players in the downtrend for the last few months. The nice thing about interest in the markets after a large fall is that the more stock that’s bought the wider the breadth, until either the bulls or the bears give up. Right now the bears are still in charge, and as usual bears always get better media coverage since portending the end of the world is good for the click business. But we’ll see how long that lasts.

The Market

The New Year has continued the trend of market unruliness (volatility) with more to substantiate it than previously observed. For example, this week Apple (AAPL) provided early guidance of their current state of revenue growth, which as everyone knows now was less than publically assumed. I have to uncharacteristically agree with a very well know pundit that I would like all companies to do what AAPL did for the simple reason that the company provided  analysts with the choice to use content over conjecture in estimating future earnings results. Other events also included the purchase of Celgene (CELG) by pharmaceutical giant Bristol Meyers (BMY). While I see this as an uneventful merger between a company with disappearing patents and a thin pipeline of replacements and a company with money to burn, that did just that, only time will tell if it works. There is the potential for a lot of talk in DC regarding healthcare, and while I favor the sector as a good defensive space, pharmaceuticals are too easy to fall prey to political attacks.

The Economy

Elsewhere in the domestic markets the defensive sectors such as Consumer Staples and Healthcare have been performing relatively well compared to the broad market. But so too have the Consumer related sectors that are a direct result of what has been a moderation in the manufacturing industries (trade) and housing industries (interest rates) while at the same time, as released today, a strong increase in job growth and increase in the unemployment rate mostly due to the increase in the overall participation rate, generally itself a good indication of rising income levels. Rising income means rising consumer activity, a big portion of GDP. On the corporate level AAPL isn’t alone as a recent decline in CEO confidence* has continued into the New Year. This is an interesting dilemma for the Fed since they are prepared to remain on watch before announcing further rate hikes. It is a further indication, in my opinion, why the markets will eventually find a place to resume its historically positive growth pattern.

The Future

It’s hard to ignore the pattern of pessimism that seems to be a popular source of entertainment. Understandably so perhaps, but the markets are rarely respondent to pessimism when real economic results present themselves. For now signs of strength in the US are still widely offset by moderation, similar to that taking place in Europe and the uncertainty of what the economy holds in terms of economic viability in China. For now my strongest indicator is the wide swings in the indexes and the goal is to complete any new buys, with equal sales and maintain a defensive posture that will increasingly rely on keeping cash at comfortable levels ready for investments that reflect a growing economy. It’s just a matter of time.

An Aphorism for Tech

Are the markets really failing, or are they just trying to say something? Investing is not the same as managing stocks and assets are not companies, which run on balance sheets not words, and fed on executive management not shareholders. And when changes that have occurred since the public introduction of the internet have shaken industries to the core, none less prepared than retail nor more prepared than finance, it’s hard not to take the recent drop in tech valuation seriously but also with a little curiosity mixed in. Every description of tech companies is probably right, Facebook has been politically irresponsible, Apple is a classic capitalist pig, Microsoft is becoming the new “old” tech company and Google was first to monetize our privacy. A lot to absorb, but I admit I’m not as concerned as those who profit from fear would like us to be, but I’m also not without concern. These are volatile times and I think the stock market has simply caught up.

Facebook (FB)

It’s common for human beings to believe most sincerely in those things that also serve their personal interests. Since its inception FB has been surrounded with a contentious crowd including those as eager to exploit it as those to destroy it. Led by a man-child who up until this day continues to exhibit the adolescent mannerisms that are the earmark of the modern day billionaire.  Zuckerberg is nonetheless the face of FB and therefor is there any reason we should be surprised by anything that is being said to attack or defend the company’s values? No, and neither should we be surprised at the volatility the stock is experiencing, at least until it announces its earnings next month. In all the biggest problem facing Facebook has been discussed here before, namely that its revenue flow is based on consumer vigor, which in turn is elevated by cleverly aimed digital advertisers. If there is an economic slowdown in the future, and too much of the current volatility raises that probability, FB could find its revenue slowing as well. A current position of 1-2% is a good intermediate term play, and the recent drop is the beginning of an opportunity.

Apple (AAPL)

AAPL gave us the iPod. Some are old enough to remember listening to an AM radio with earphones, migrating to FM, to Walkman, to Discman, all the way to iPod. My point? Its originality didn’t rest in what the device could do it rested in how it did it. The move to the iPhone was then meticulously introduced and the subsequent introduction of the iPad alongside to complete a device for everybody that could do everything the previous products did and more. My other point? AAPL has a neat way of cannibalizing its older products such as IPod and even removing support of the device inside of a few years to compel users to upgrade to newer products. This kind of savvy capitalism is old school and in my opinion the behavior will increase because AAPL will unlikely come up with another brilliant idea soon and they know it. One reason why they are introducing their newest iPad, a nine inch model for $325 (cheap by Apple standards) is to target institutions of education. A noble aim, but also one likely to get crowded over the next five years as Microsoft and Google bring their own widely familiar hard/software products to the game. AAPL has sold off a lot, pays a decent dividend and will always be a good holding. A current position of 2-3% is a good long term play.

Google (GOOGL)

Google is between the proverbial rock and hard place. The company is very much beholden to advertising for the majority of its revenue, but areas that it could easily monetize such as its Android operating system for smartphones, it provides for free. No small give up for a product that was determined in 2017 to be installed on over 60% of all smartphones in use. Luckily the company does charge for many of its phone services such as Gmail and Google Maps. And while the company closed any further research on its Google Glass product, probably squandering billions of dollars, could the future of the driverless car be in doubt? A lot to absorb and a lot to risk. However the company is innovative and could bounce back in the same way as Facebook, at least it should. A current position of 1-2% is a good intermediate term play and an increase would be warranted when the sector overall looks beaten up enough.

Amazon (AMZN)

AMZN is, in my opinion, the most interesting company in history. Even as the President tweets that the company is hurting brick and mortar and the US postal service, the overreaction of the stock price ignores the introduction of email and the subsequent revisiting of a time Ford was similarly attacked when the automobile virtually ended the pre-industrial horse and carriage. While the concern for disappearing industries is no laughing matter, AMZN is a true innovative business model that hasn’t competed as much as it has stood in the way. And with its bloated balance sheet and reckless business strategy (Washington Post, Whole Foods, Zappos, etc.) what next, Electric Cars, A Sports Team? In my opinion one can carry a 2-3% position easily in AMZN for the long term, but don’t count on an announcement of dividend nor a decrease in volatility any time soon.

Microsoft (MSFT)

MSFT is a company that only occasionally steps away s from its primary business. In the same way Apple forgets that it is a hardware company before a software company, MSFT is the reverse. So when the company tries to enter the cellphone industry, they shouldn’t have and they realized it quickly. This highlights the welcome decisiveness and professionalism of the current management. All of which drive the company’s resources in continuing to build its most popular product, Office. The result has been a better performance in the recent decline, for both fundamental reasons, and also, like AAPL, because it pays a healthy dividend. The likelihood of MSFT continuing this trend is high and maintaining a current position of 2-3% for the long term is in my opinion manageable risk.

Recommended positions in the Tech sector are also based on the impact that the recent volatility could mean for prices overall. One impact of a market decline could be a pause in consumer spending. Patience is a good investment, therefore I’ll lookout for changes in consumer sentiment data, which has been very strong over the past 12 months. Other impacts are irrational actions led by a very large contingent of self-proclaimed investors who, courtesy of human nature, are inclined to sell with enthusiasm and procrastinate on buying. And lastly is the short contingent, led by tech trading and hedge funds who see an opportunity to use volatility to their advantage by exploiting the channels of media to send opinions with unsubstantiated confidence and often uncertain credibility. Oh yeah, and losses.

Vol Is Here To Stay

“You will never fully convince someone that he is wrong, only reality can do that.” 

                                                                                                                                               -N. Taleb

The mystifying behavior of the capital markets is nothing new, at least over the span of my own involvement. However the current scenario generates all the more concern because how quickly information is passed via the internet. And if that’s not enough, much of that information is neither edited nor confirmed but nonetheless is embraced by media and subjected to literal analysis. So what happened to cause the volatility last month that seems to have evaporated this month? Nothing, but this is what happened that was ample evidence to lay blame.

Markets

Last month gave the broad indexes their first meaningful correction in exactly 2 years. While no specific piece of legislation, nor economic surprise caused the volatility the outcome was met with surprising order. The gap down of nearly 10% brought the broad indexes to flat on the year only giving up the gains which in my opinion are too often, too dependent on earnings results. 10% is a respectable correction by any standard, but it is not the same at 1000 points on the Dow Jones, blown out of proportion by pundits while representing barely 2% of the index. Nonetheless their goal was met and volatility spiked and within the unruly market active sellers were met with equally eager buyers and although some sense of stability was in the outcome the internet was primed for the next piece of earth shattering news. Should the market be volatile on this subject? Sure.

China Trade

By the end of last week the new poster child was the administration placing tariffs on steel and aluminum imports. I was somewhat surprised that so few pundits recalled that protectionism is nothing new to the US and has been even more frequently sourced by Europe and a handful of Asia Pacific economies. The difference here is that this administration likes to advertise its decisions with a sense of enthusiasm that many (including myself) don’t share. That aside, since the end of the last World War the US has been a leader in providing access to its rapidly expanding post war economy. In fact much globalization can be traced to the contributions the US has made sharing its economy to help nurture growing economies abroad. China was one of them and by the time they were provided access into the World Trade Organization the tag “Emerging” meant little in the grand scope. But that hasn’t stopped them from initiating protectionist motives of their own. Challenging the intellectual property rights of tech companies, coopting manufacture industry products and hindering the ability of foreign companies eager to set up in China 20 years ago to expand without compromise. All, in my opinion, begs for a new trade arrangement and maybe, although not the best strategy, this recent move by the administration might trigger some action. Should the market be volatile on this subject? Sure.

Economics

This week Job growth outpaced expectations by rising over 300k in the month of February, usually a seasonally less robust month. More recently Consumer Sentiment and Manufacturing data was released and both were near their highest since 2004. This is consistent with recent activity that still has the economy on track for a growth rate at or near 3% for the near term. This is supported by chatter from various central bankers and other voting members of the Federal Reserve who suggested that as data continues to show strength so too will the Fed continue to respond (i.e. higher rates). Should the market be volatile on this subject? Sure.

The Message

Volatility is not by itself a reason to buy the market. Often the unruliness can make the environment feel worse than it actually is. But likewise the opening for buying assets at lower prices than they were 3 months ago is compelling, so for now the volatility is a battle between a market that is craving to be understood and an investing public that is craving to spend some cash. The former acting in accordance to the latter?  Why not, markets are generally grounded in fact, investors are more compartmentalized. Should the market be volatile on this subject? Definitely.