A Market Transition? We Hope So!

It has been a lousy stock market lately, although we suggest that this is part of a healthy reassessment which has actually been going on for a long time -- well over a year, in fact, since many small and middle-sized companies are already considerably off of highs reached before then. We believe the market needs to shake off its dependency on the U.S. Federal Reserve's easy monetary policy.  Essentially, we think we may be starting the much-needed process of weaning markets off of the perceived need for liquidity from the Fed as the basis for keeping the markets afloat.

It is our view and has been for some time that the world needs to transition from liquidity as the driver of value to business fundamentals; that we need to get back to investing for investment's sake and off of financial engineering, whether that engineering is done by the Fed or by businesses themselves. And while the process may be painful in the interim, particularly because growth oriented companies get caught up in a "risk off" mentality, we think the focus will eventually turn to business acumen, and the business merits of companies as the determinant of stock values.

At this time, the mentality of the market is to be afraid of a stronger dollar and higher interest rates.  The truth be told, many of today's market participants have only experienced the Fed-induced market of the 21st century in their careers. They've only been in this business during this period of great Fed influence. We believe we will eventually return to a 1980s-90s-type of market in which the U.S. Dollar, interest rates, and stock markets are more positively correlated (at least in the sense that the absolute level of interest rates is higher, not that interest rates need to drop) and commodities ease, including gold (maybe most notably gold).  This will allow for a much healthier market environment and one which is more friendly towards businesses that are performing well from a business standpoint, not just those who are managing stock buy-backs and "tax inversions" as the means to drive stock prices.  It will also incentivize businesses to increase capital investment, which has been sorely lacking in this anemic economic recovery, thereby fueling more overall business activity, and solid growth.  As we stated earlier, this may be a bit painful but in the longer term it is very healthy.  And we would also add that in order to really get this transition on track, we will need more business- and investment-friendly policies out of Washington.  

Stay tuned!