The reality that markets are mere reflections of human action has been a growing theme herein of late. And while that’s easy to get, and should go without saying, it is the most important distinction that I hold firmly in mind as I go through my daily and weekly exercises in pursuit of the knowledge of the state of general conditions.

Let me ask you — those of you who stay intimately in tune with the movement of the stock market — how do you feel today versus how you felt at the end of last month, or versus when you opened your December account statements?


Being fully aware of what ultimately moves prices, I pay very close attention to my own visceral responses to virtually all stimuli as I track a variety of markets day in and day out. And when I say “all stimuli” I mean “all stimuli”. For example, I’ve noticed at times that when I wake up feeling a certain way (“good” or “bad” perhaps) and I see certain patterns in the charts as the markets open first thing in the morning, literally within a millisecond of that first sip of coffee I’ll sense fresh, bullish patterns suddenly emerging. As I type this on a Friday morning, the sun has just pushed through the clouds and through the window of my home office, warming my right shoulder and the right side of my face. It feels good, and the market feels better than it did just a minute ago…


On an occasion when a client seems unusually stressed over a market decline, if I don’t already know I may — if it seems appropriate — ask a few personal questions to see if anything has changed in his/her life that might have changed his/her view of the outside world. Or I might ask him/her to go grab a cup of coffee and call me back in 10.

In his provocative book Power vs Force, Dr. David Hawkins points out that:

“…the mind that reads Chapter 3 will not be the same mind that reads Chapter 1.”

As an investor, and as an investment adviser — and, not to mention, as a husband, a father, a grandfather, a friend, and a regular interacter with all manner of humans — with a mind, I can definitely relate!


While staying forever conscious of, and monitoring, how external stimuli can affect my moods, and knowing that I’m no different than our clients — let alone my other 7 billion brothers and sisters — it is utterly critical that the methodology which instructs my decisions related to yours and my portfolios is robust and scientific.


Now, the thing about “scientific” when it comes to financial markets, is that we’re of course talking social science; as, again, the markets are mere reflections of society in action.


Clients know that our PWA Macro Index plays huge in determining our approach to asset allocation. And I present it in a manner that suggests that when its aggregate score is in the green we’ll remain growthy, when it’s red we’ll get defensive. And, yes, that’s precisely what you should expect. But that doesn’t necessarily make it a rigid system — akin to some algorithm that would have us moving millions of shares of stock on a dime. For one, I am fully aware that every single one of my 86 data points reflects some dimension of human action. And, thus, given that the factors influencing human action today are likely to be different than they were in years past — what makes for a negative reading the next go round may look different than it did in my back tests of the late 90s and the late 00s.


In essence, as we crunch the plethora of data captured within our index, clues will emerge as to how best to get defensive — when the time comes. Could be that the next recession occurs before the Fed (humans in action) has finished its job of getting rates sufficiently high, and its balance sheet sufficiently low, to attack the slowdown via conventional means. That would have implications in terms of to what extend we exploit the bond market, and in what manner (short vs long-term bonds, for example), or to what extent we utilize the ultra-interest rate sensitive utility sector. If healthcare stocks, for example, continue their strong run right up to the end of the current expansion, we might to some extent, or completely, find ourselves avoiding what is otherwise considered a defensive sector. If, for another example, the next recession occurs amid a world embroiled in a trade war (human politicians in action), we likely won’t find ourselves piling into consumer staples stocks as we might have had the slowdown turned out to be more of your garden variety; as such companies do huge business in foreign markets. And on and on…


As for the here and now, the aggregate reading of our index — of the economically-impacting actions of humans — suggests near-term recession risk remains low, while our read of the details therein dictate that we maintain healthy weightings in the industrial (15%), materials (15%), financials (15%) and consumer discretionary (12%) sectors, while remaining moderate in our targets to tech (10%), consumer staples (10%), and health care (10%).


Here’s how the above sectors have performed to start the year (through 1/18):


Industrials: +8.97%
Materials: +5.92%
Financials: +9.15%
Cons Discretionary: +7.88%
Tech: +5.44%
Cons Staples: +3.29%
Healthcare: +4.13%


Ironically, this year’s best performer thus far was last year’s worst, which carries for now an 8% of equities target:


Energy: +11.32%


As for the major averages:


S&P 500: +6.54%
NYSE Composite: +6.83%
MSCI World: +6.17%


Of course the year is very young…


Enjoy your coffee!
Marty