This past weekend we were fortunate to be invited to participate in David Kotok’s annual fishing trip in the great northern woods of Maine. This event, organized by the co-founder of Cumberland Advisors, dates back almost 30 years, but took on special importance post 9/11. As the attendee list consisted of a collection of economists, advisors, traders, market strategists and portfolio managers, thoughtful discussions and strong opinions were plentiful, augmented by a surprise visit by Senator Susan Collins. Elements of the long weekend were covered by The Wall Street Journal, Barron’s, ETF.com, and frequent market commentator and financial advisor, Barry Ritholtz, all of which I’d encourage our readers to explore.
I went to the woods with a particular thought in mind. That is, at a time of broadly overvalued stocks, yieldless fixed income markets, and persistently low volatility, what will be the impetus for a material change in market sentiment? With that question guiding me, I attempted to suss out the wisdom of this particularly learned crowd. Here are a few takeaways:
- Most think the Fed will continue down a dovish path for fear of upsetting what has been a less than robust economic recovery. (A good outcome perhaps, but not the inflection point for which I was searching.)
- The rate of change in the political freedom of a country is a strong indicator of the long-term health and direction of its markets. (With major change occurring at home and abroad, we might be getting warmer here.)
- U.S. investors focus too much on the actions of the Fed, and too little on the actions of central bankers around the globe, so we are collectively blind to potentially problematic policies overseas. (Warmer still.)
- China is a barometer for the world’s economic health, and it is on the downslope of the growth curve. (Ditto)
- P/Es are high at a time of extremely low rates and high margins. And while many point to these coincidental indicators as justification for high valuations, the reverse should be true. Margins are mean reverting and low rates are indicative of slow growth, which we wrote about here. (and cold again…completely accurate arguments, but not the near term triggers for change.)
Ultimately, short of a few ideas that could only be cataloged under the “Black Swan” column (think North Korea, etc.), the answer to my question evaded my efforts. And I suppose that shouldn’t be surprising, for if there did exist a high probability risk lurking in the shadows, market sentiment would already be shifting.
On a related note, forecasting within a complex environment with biased participants is, we believe, difficult if not impossible. We are all pretty good with linear, but not so much when the number of variables to consider increases materially, which is why almost everything we do here at 361 Capital is grounded in behavioral finance and implemented in systematic ways (computers do tend to win on consistency measures). Regardless, ours is an industry of constant change and continuous intellectual challenge, and I’m always grateful for the opportunity to learn…and catch fish.