One of the interesting (and frustrating) aspects of the current environment is just how muddled the evidence is right now. While it’s true that there’s always a bullish or bearish case to be made, it’s struck us lately just how far the gulf between the two camps has grown. The independent analysts that we follow, all of whom are seasoned market observers, are all over the map. Some are extremely positive and are looking for big gains for the second half of the year, while others are terrifyingly bearish. As we’ve said now several times in conversations around the office: Someone is going to be really right, and someone is going to be really, really wrong with their market calls.
A couple of economic indicators released last week serve as a nice microcosm of this dynamic. On Wednesday, the Conference Board’s LEI exceeded expectations, and made a new high for this cycle, clearly pointing towards continuing economic expansion. And on Friday, the Economic Cycle Research Institute released their proprietary Weekly Leading Index, falling to the lowest level since January and off by more than 5 points since its recent high in March, pointing to a slowdown (or worse). There we have two leading indicators, constructed differently, with diametrically opposed implications.
All of this leads back to our being comfortable at neutral levels of risk. We’ve acknowledged that neutral isn’t the most exciting investment position, and by definition means that outperformance will need to be generated by security selection as opposed to asset allocation. But we also know that in all likelihood, we won’t remain at neutral for a very long time. Inevitably, the weight of the evidence will begin to tip in one direction or the other, and that will present an opportunity to make a meaningful shift with portfolio allocations.