6 Contributors To Future Performance

by: Mike Lipper, CFA


Delivering on funding goals is more important than ego satisfaction.

Investors and their managers want to be winners, or at least feel like winners. That is why there are daily price movements published, which is the same reason why most US race tracks have eight to ten races a day. The one clear observation on both presentations is that it is almost impossible to be a winner in every investment and every wager every day.

One of the lessons I learned at the track and investing for our clients is to be highly selective as to which contests that I choose to put money into.

My style of both investing and other wagering is to focus on what contests are important to win. This has led to the development of the TIMESPAN L Portfolios®, which looks to meet critical payment needs broken into various time periods. With that as a guiding principle, I tend to sort the enormous amount of daily inputs we all are besieged with, by assigning them to different time spans. In that way, the information is put into period-based categories where the information is most useful to aid in achieving goals.

Six Timespan Sorts

What follows is how I sort the flow of information (and perhaps misinformation) into the most useful time spans.

  1. Present trading environment - A quick look at the price indices for the three major US stock indices have very similar patterns. In the recent burst of enthusiasm, all three had upward price gaps which lasted for a few weeks. One of the rules of thumb is that eventually all gaps have to be filled by an equal and opposite reaction. This has been done. Soon after filling the gap, upward momentum stalled, and now the price patterns appear to be in a top formation. The "bulls" would characterize it as a consolidation awaiting further, hopefully positive, developments. After all, there has not been as much as a 1% decline in the value of the S&P 500 in any single day since October 11th, 2016. (Barron's has noted that after the last period of 100 days without a single day drop of 1%; was followed a year later, when the index was up +75%.)
  2. Current economic picture - While central banks tend to speak in terms of government-sourced economic statistics, they are starting to react to the signs coming from the commercial world. Around the world, many businesses are getting better with the only short-term concerns in finding qualified help. We personally know of US businesses hiring and the apparent replacement of old help wanted ads with new ones at higher initial wages offered. Growth is sporadically picking up globally, selectively in Europe and significantly in Indonesia and Singapore. While not always accurate, The Economist has an article headlined "The global economy enjoys a synchronized upswing."
  3. China remains both the short-term and long-term wild card. US Secretary of State Rex Tillerson is in Beijing meeting with his counterpart. This is a "getting to know you" meeting, trying to find areas of future cooperation. Combine this with the speech of Apple's* (NASDAQ:AAPL) CEO on Saturday in Beijing and his meetings early next week with the leading political and economic leaders of China, which can further clarify the nature of Chinese progress in becoming an even bigger player on the world stage. While the current government of China has apparently managed its economy best in the world of large nations, a recession or even a major slowdown in its growth would be destabilizing to the US and much of the world. This possibility does not appear to be priced into the global stock markets.
  4. Market leadership and structure changes could be disruptive or opportunities. Charles Schwab* has issued an intelligent study that portrays that the superiority of small caps compared to large-market capitalization stocks is going to be reversed due to both market liquidity concerns and valuations. This view could be supported by The Financial Times which reports a study that predicts that one-third of City (UK's Wall Street) analysts will lose their jobs due to regulatory disclosure practices. They note that this could produce more underpriced securities, which will tend to be in small to mid-caps. We have seen for some time similar trends within the US, which is one of the reasons why US small caps have performed so well, as captured in a number of mutual funds. A Quarterly Institutional Review by Dimensional Fund Advisors demonstrates that the superior performance of many small caps comes from value and core funds, not small-cap growth funds. Our investment funds and portfolios will almost always have different mixes of large-cap and small-cap funds.

    *Stocks owned either personally or in the private financial services fund I manage.
  5. The march of what is called "popularism" will probably continue despite this week's Dutch election. While that particular populist party did not come out as the feared leader, it did add to its number of seats, while the victorious establishment party lost a much larger number of seats. Despite the sense of relief by the establishment's financial inherent leaders in France, FT noted in a headline "Financiers lineup to engage with LePen." I speculate that unless the various establishment parties launch new programs that effectively address the levels of dissatisfaction being expressed globally, it is only a matter of time before there will be a political leadership change. (I am not suggesting that those that are not part of the governing bodies will themselves provide solutions, but have the advantage of the old slogan "throw the bums out.")
  6. Final Worry - According to my old firm's research, on a global basis, investors have put $1.1 trillion into bond funds in the last three years, compared with $750 billion into money market funds, $569 billion into equity funds and $123 billion into mixed asset funds. At some point, with the built-in rise of interest rates and signs of inflation, bond prices will decline and put investors further behind in their needs for retirement capital. The bond market participants include not just slow-moving investors, but also trading entities, including ETFs and hedge funds - some of which borrow heavily against their portfolios. If bond prices collapse due to the lack of market liquidity, one could see significant counterparty risks which could hurt the stock market regardless of the economic outlook. These counterparties may have to sell their equities at any price to meet their margin-called debts.