Y H & C Investments Monthly Review: January 2020- Edition 138
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US. Economic & Financial Markets Outlook- Great Year for US Markets In 2019 Led By Strong Consumers and Low Interest Rates (Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)
In December, the Dow Jones Industrial Average gained 3.77%, the S&P 500 grew 4.45%, and the NASDAQ increased 5.30%. During the final quarter of 2019, the Dow rose 7.40%, the S&P 500 levitated 9.88%, and the NASDAQ ballooned 13.45%. The final figures in 2019 show gaudy gains for all US Indexes. Looking at other interesting numbers, the ten year treasury bond opened the year at 2.715% and ended up at 1.91%. Oil prices had a strong year with WTI increasing 34% and Brent ahead by 23%. Gold also saw strong gains, opening in January at $1320/oz and closing in December at $1520/oz. What else can we glean from all of these lovely numbers?
First , the decade long policy keeping interest rates low helped investor enthusiasm for all assets. The continued strength of the US economy remains dependent on consumer spending. With the US unemployment rate sitting at 3.6%, jobs are plentiful and consumers are willing to spend freely. Inflation remains dormant at 2% or below, as has been the case for a long time. The lingering issue for investors is the sustainability of these conditions. From a policy perspective, low interest rates are tolerable and won’t be changed as long as inflation stays in control and employment trends remain so robust. Central bankers aren’t going to change anything with markets keeping investors fat and happy. If, however, inflation starts to creep higher, employment trends dip, or, maybe most significant, the dollar starts drop, markets won’t stay calm. The value of the dollar seems the most vulnerable to changing domestic economic growth rates as trillion dollar deficits and massive unfunded liabilities remain facts that US politicians never seem to address. Given the dormant nature of energy prices, along with non existent wage inflation, central banks and politicians won’t change their course unless markets force them to. What about the stock market and it’s prospects for 2020 and beyond?
S&P 500 profit estimates range from $170.00 to $180.00 for the index in 2020, which makes the current multiple of 18x forward earnings slightly above the long term average of 15-16x. There is tremendous disparity in valuations among individual companies with a few entities rewarded with much higher multiples and the vast majority stuck with industry averages or worse. Nearly all of the variation is company specific. We know the 2020 election cycle will be a big focal point. Given where markets currently are, I suspect we will see plenty of volatility until a final election resolution is determined and keeping your expectations muted probably is appropriate. Still, there are always plenty of opportunities, the key question being which ones fit and at what price?
Global Economic & Financial Markets Outlook- World Markets Post Big Gains As Low Interest Rates and Negative Yields Support Europe and Asian Markets! (All country index data provided by countryeconomy.com, January 1, 2020.)
European and Asian markets saw strong equity market performance in 2019. With up to 20 trillion dollars of negative yielding debt issued by foreign governments in 2019 (the outstanding number is half that now), central banking policy remains committed to improving growth rates of economic activity in countries which have been struggling. As inflation remains tame, the UK is leaving the EU, and China continues to prioritize domestic growth and expansion into logistically critical areas (Eastern Europe, Asia, Africa). Let’s take a look at some numbers from 2019, shall we?
In Europe, Germany’s DAX was up 25.32%, France’s CAC increased 27.48%, UK’s FTSE rose a mere 12%, as did Spain’s IBEX, with Switzerland’s SMI growing by 25.4%. In Eastern Europe, of note was Romania’s BET soaring 34.74%, Hungary’s BEX growing 15.98%, Turkey’s ISE bucking up 28.76%, and Russia’s RTS exploding 42.52%. In Asia, China’s Shanghai Index pumped up 23.81%, Hong Kong’s Hang Seng saw a 12.12% rise, Japan’s Nikkei expanded 20.53%, and India’s Sensex increased 14.98%. In South America, Brazil’s Bovespa gained 31.08%, while Chile was one of the rare country indexes which fell, dropping 12.86%. Elsewhere, Canada had a nice year, popping 18.93%.
Looking forward into 2020, coming off such a strong year for global equities, it is worth repeating the thesis that central bankers are not going to change their policy stances one bit when thinking about interest rates or inflation. The key areas to watch will be economic growth rates in Europe and Asia, especially China, and how they compare to the United States. If there is significant improvement in the rest of the world, it might start to put pressure on central bankers to consider normalizing interest rates. Until then, low, low, and lower remain here to stay, especially on the global front.
The Art of Contrarian Thinking-Why Do I Own This? (YH & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)
One of the biggest obstacles investors have is owning assets which have little capital appreciation over a long period of time. It is only natural to get frustrated when a stock never seems to go anywhere. In my opinion, one of the most helpful techniques to use in approaching the psychology of keeping a non-performing stock in your portfolio is to ask yourself, “Why do I own this stock?” A good answer will revolve around a simple reason which is still applicable to the holding. For example, it makes a great deal of sense to own companies which provide software security and protection. The underlying reason behind this is the potentially large liability incurred by large organizations which have their data compromised. What company will choose not to protect their critical information under these circumstances? None, if they are logical and don’t want to expose the organization to millions of dollars of potential legal liability. In the case of owning a security software financial asset, if you monitor the performance with this simple rationale in mind, it might keep you in the stock even if it has no capital appreciation. If your underlying reason is still valid, having patience and sticking with the company usually pays off.
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(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)