Y H & C Investments Monthly Review: February 2020- Edition 139
US. Economic & Financial Markets Outlook- 4th Qtr GDP Comes In At 2.1% As Consumer Spending Holds Up!(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 January, the Dow Jones Industrial Average gained lost 1.32%, the S&P 500 fell .29%, and the NASDAQ increased 1.44%. With consumer spending representing 70% of all domestic GDP, it remains the bedrock of US economic growth. The manufacturing component remains in a slump because of tariff concerns, trade related issues, and uncertainty about future policy stability. In the consumer area, reliable sectors of health care, education, housing, defense, and autos all contribute to a steady economy. Discretionary spending also chips in with industries like entertainment and gaming usually dependable. Renegotiated trade agreements in North America and phase one completed with China could potentially add some incremental improvement on the industrial side. One area which bears watching is energy, and specifically U.S. oil production growth. With shale production in the Permian basin driving year over year production gains for the last decade, 2020 projections show incremental additions of nearly nine hundred thousand barrels per day, to a total of close to 13 million barrels. The largest oil service companies don’t necessarily see eye to eye with the idea of continual production expansion in 2020. Any discrepancy, in this case a shortfall, would have an impact on global oil prices. If one looks at the strengthening of the dollar over the last decade, some of the attribution should go to the change of circumstance for the US from a huge importer to now a global exporter in oil and gas.
Examining existing economic conditions, they remain quite favorable for business. With inflation dormant at or below 2% for the last decade and the ten year treasury bond trading at 1.54%, financing is plentiful. Merger and acquisition activity and related corporate transactions have plenty of fresh capital available from investment and commercial banks, along with a great deal of dry powder at private equity shops. Energy is cheap and abundant, although transporting it has it’s challenges. Earnings season has shown profits are abundant across many industries, with natural variation among specific sectors. Valuations of financial assets are a touch elevated, but interest rates are so low you can justify a higher multiple. As we proceed into the spring, investors are skittish about all kinds of factors, including the upcoming Democratic nominating process. It is always important to be on guard and pay close attention to economic events and anything related to your holdings, and now more than ever that still remains a solid course of action. Pay attention.
Global Economic & Financial Markets Outlook- Corona Virus Concerns Take Back January Gains Across the Globe! (All country index data provided by countryeconomy.com, January 31, 2020.)
Global equity markets sold off during the last week of January as the Corona Virus outbreak in China led to fears it would affect global economic activity. The nature of markets are gains take a long time to generate and are difficult to come by. Selloffs happen quickly, at any time, spare no sector, and come out of nowhere, aka, the Black Swan, a third standard deviation event (popularized by Nicholas Taleb). The Corona Virus is a classic example of such a swan. Right now, with no vaccine, thousands of affected Chinese citizens and a growing number of fatalities, one could project it causing a great deal of harm for the foreseeable future. It is hard to remember the future is always uncertain, and in time, most medical situations like this one have a good chance of getting solved, though it may take considerable time and money. With that, let’s look at some numbers from January’s markets.
Starting in Asia, the Shanghai exchanges were down anywhere from 2.4% to 3.2%. Taiwan lost 4.18%, Hong Kong fell 7.09%, Singapore retreated 2.13%, while the Philippines surrendered 7.86%. India (-1.29%), Indonesia (-5.71%), Thailand (-4.16%), Japan (-1.91%), and Vietnam (-2.54%) rounded out a tough month for Asia. Across Europe, the same dynamic held true with most markets falling anywhere from 2-5%. Turkey bucked that trend, gaining 4.12%. Also, not to be forgotten, the UK formally exited the Eurozone today. It was much calmer across the Atlantic with Canada (+1.49%) and Mexico (+1.30%) in the green, while Brazil (-1.63%) and Chile (-2.55%) taking some losses.
Looking ahead, don’t expect central banks to change their policies because of health issue scares. It is interesting that right now, concerns about negative bond yields, inflation, or trade relations have nothing to do with the negative psychology sweeping across the globe. It only proves you have to have a strong stomach to be an equity investor, no matter what market.
The Art of Contrarian Thinking- It’s Easy to Forget: the World Can Only End Once! (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)
The onset of the Corona Virus spooked investors over the last week. Many investors become nervous when they see large drops in the value of their assets taking place over a week, month, quarter, or even longer. History confirms there have been plenty of periods in the equity markets where Ben Graham’s famous imaginary character, Mr. Market, becomes overly pessimistic about the future. In the 1970’s, it was high inflation and stagnant growth which caused the fretting, with a little help from Watergate. In 1999-2000, the dot com insanity eventually ended, causing a huge 80% peak to trough crash in the Nasdaq. Of course, in 2008, after a decade of real estate booms, the bust took the famous investment banks of Bear Stearns and Lehman Brothers off the playing field, along with savings and loans giant Washington Mutual. It also nearly took down AIG, Merrill Lynch, Morgan Stanley, and even Goldman Sachs. All were in a period of nearly a year or more where markets felt like they would never stop falling Yet, if you held on, or even better, decided to take advantage and purchasing what you wanted when Mr. Market was quite pessimistic, you probably benefited a great deal. Markets in other parts of the globe experience the same phenomenon. If you look at what took place in Greece, Iceland, Mexico, Argentina, and Turkey over the last twenty years, you see the same trend. Almost every market has a very difficult stretch, but over time, they recover. Some take longer than others. If you have the patience, stomach, and will to hold on and hang in there, eventually you usually profit. Thank you for taking your time to read the monthly review, it is very much appreciated.
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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)