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Market Surprises in 2019, What Might 2020 Bring?

Market Surprises in 2019, What Might 2020 Bring?

‘Things are not always what they seem;
the first appearance deceives many;
the intelligence of a few perceives what has been carefully hidden.’

Phaedrus


With ten days to go in 2019, after plenty of potential problems, equity investors who have held fast to their positions have seen strong gains. Probably more important, with the Federal Reserve indicating that the foreseeable future will be non eventful, meaning no interest rate hikes, what might the new century bring for investors?

Much depends on your perspective and what kind of assets or companies you currently hold. Over the last ten years, the clear winners have been growth companies. The general consensus for investors is to pile into passive instruments with the assumption that is the most risk averse way to have equity exposure. The bond market is an alternative, although with most credit spreads minimal and the ten year treasury trading at 1.92%, the idea that value exists in credit instruments is probably a stretch. Even more of a question mark would be bonds in other parts of the world, where there remains trillions of outstanding debt with negative yields. With inflation running at a shade under two percent, owning bonds probably gives you no real return or even a negative one at that. What about commodities?

Oil sits at $60 a barrel for WTI and $66 for Brent, but energy stocks have been abysmal the last decade and plenty of exploration companies focusing on shale have seen their equities collapse because of poor balance sheets and the high costs of extraction. Replacement rates in the shale areas also show the lush parts of the largest fields might be starting to deplete, so the idea that US production will continue to see the explosive growth over the next decade also has to be questioned. Alternative energy will continue to probably see strong growth, but at least for the next decade, oil and gas remains the globes key fuel source. Gold sits at a shade under $1500 an ounce and silver a touch below $18/oz. With no yield in these instruments, the current interest rate environment is beneficial, but no guarantee of any kind of meaningful move, unless of course, well, we will mention politics in a second. Let’s turn to a different area, the enormous property market.

Real estate assets have been solid holdings, with the caveat being retail malls and their overcapacity issues. In technology, the concentration of value has centered around the largest companies, along with security and enterprise software providers. Media has been a very difficult area, unless you owned one of the largest entities. In 2019, high profile IPO’s were not kind to public investors, unless you were a venture capitalist looking for an exist on the first day of a public offering. You have to believe the poor performances of Uber, Lyft, Slack, Pinterest, and the debacle that was WeWork will put increased scrutiny on any company looking to go public. The most high profile IPO of 2020 will most certainly be Airbnb. In the deal world, 2019 was a strong year and with plenty of fresh capital sitting on the sidelines with private equity, mergers and acquisitions should probably be active next year as well. What about the lingering issue of valuations?

With analysts projecting S&P 500 earnings to be in the range of $170-180, depending on your view, the broader market trades at 18-19 times forward earnings, just a shade over its historical average. As the year progresses, all attention will focus on the US election cycle and what will transpire politically. The good news is the world will get an outcome in November of next year. Anybody who believes they can predict what the outcome of the election will be and how the United States Congress will be composed is selling air. We can look at polls, fundraising totals, sentiment indicators, impeachment, etc, but given the unpredictability of politics, the candidates, and the divided nature of the US electorate, the best course of action is to expect very little. At the very least, the best we can say about the election cycle is that it will be eventful.
Anecdotally, I thought I would mention what I consider one of the largest problems investors face, which is the actions of executives and their ability to capitalize on their own stock ownership. Over the last few months, in a couple of the excellent companies we own, executives have presented at investor conferences in an effort to describe the current state of those businesses. In the days following these presentations, the very same executives were selling their own stock after extolling its virtues to the public. Not a good look. Now, these companies have outperformed for a long time, and there are windows where executives only have a certain period where they can sell their stock. Still, this kind of thing, along with the heavy granting of options and restricted stock to executives, is an area where the investment community really needs to examine what is taking place. It certainly could provide more ammunition to those politicians who continue to take aim at corporations for causing the wide disparity of income.

In the markets last week, it was pretty quiet on the earnings front as the biggest reports came from Fedex (big miss), Nike (strong beat), Micron (a slight whiff), and Darden Restaurants (good results). I hope 2019 was a good year for you and the next decade is even better.

Here are a few more predictions for next year if you are interested-

https://www.cnbc.com/2019/12/19/art-cashins-predictions-for-2020-including-more-wins-for-stocks.html

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Thank you for reading the blog this week, and if you have any questions about investing, please email me at information@y-hc.com.

Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.

 

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