Tuesday, April 3, 2018

This Week's Message: The Long and the Short of Current Conditions

As managers of what we'll label long-term (retirement, generational wealth, institutional, etc.) portfolios, it's general conditions and the long-term setup that we're ultimately concerned with. That said, in that in our view good communication ultimately leads to emotional comfort among our clients (our ultimate aim), we believe it's important to continually offer insight into the day-to-day goings on that influence short-term market movement and, alas, the financial media's messaging. 

With that in mind, here's from Bloomberg's emerging market update this morning:  
"Focus this week will turn to U.S. manufacturing data Tuesday and labor-market figures Friday, which are expected to show the jobless rate fell to its lowest since 2000. Traders are also waiting for more details on American tariffs of Chinese imports."
Those two sentences pretty much give you respectively the long and the short of present market conditions. 

So, yes, and again, the short-term focus is on trade. As you've noticed, when the news suggests that greater barriers to international trade lie ahead, stocks sell off violently. When it suggests that cooler heads -- who understand the danger, and the history, of protectionism - will prevail, the market rallies with passion. 

As for general conditions, this week our PWA Index (81 economic, equity and credit market data points) scored a historically solid 56.79, which was a 7.41 point improvement over last week. As for the stock market's long-term trend, per the chart below, it remains solidly bullish.

The monthly Bollinger Band indicator lays a security's 20-month moving average on top of the price, enveloped by two standard deviations on either side. Past bear markets have occurred when the S&P 500's price traded below the moving average, but only after the price reached the lower band and the moving average began sloping downward. As you can see, this has proven to be an excellent long-term trend indicator:

click to enlarge...

In a nutshell, when our assessment of general conditions reflects an environment conducive to economic and corporate earnings growth, we maintain a growthy asset class and sector allocation, until the weight of the evidence changes, irrespective of short-term noise and volatility. When, on the other hand, conditions reflect a weak environment conducive to corporate earnings contraction, we'll adopt a more defensive posture, with preservation of principal becoming our chief concern.

We'll keep you posted...

Have a nice week!

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