US Economic & Financial Markets Outlook: As the Fed Moves to Ease, Earnings Roll In, Doomsayers See Recession! (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 July, the Dow Jones Industrial Average lost .38%, the NASDAQ grew by .06%, and the S&P 500 fell by .52%. As the long summer brings day after day of record temperatures, the non-stop heat is only matched by the steady drumbeat of quarterly financial reports coming across the vast cross section of industrial groupings. With U.S. GDP growth settling in at the 2% level, some see the easing of monetary policy by a flip flopping Federal Reserve as a precursor to an oncoming recession. Statistically, the United States economy has enjoyed ten plus years of economic growth. It is logical for analysts trained to investigate every decimal point down to the hundred thousandth to come to the conclusion that a recession may be coming because of the rate of change in the growth rate, meaning downward (3-2%). Of course, if one goes by fundamental statistical principles, the most significant premise is each event is an independent event. Last decade, last year, and last quarter’s growth have minimal impact on this quarter. Please keep this idea to yourself, and certainly, don’t mention it to any executives of casino companies as they might get nervous that the public is on to them (right).
As for specific numbers to consider, with the ten year Treasury note yielding 2.06%, bond prices remain considerably elevated, both domestically and globally. Oil prices remain in the 50-70$ range with the floor helped by OPEC production cuts and the last remnants of Venezuela’s production eroding, while the cap comes from Permian power and sluggish Chinese demand. In the capital markets, merger and acquisition activity remains solid while FICC (Fixed Income, Commodities, and Currencies) was weak across the board. Freshly minted IPO’s have performed much better than many expected , Zoom, Beyond Meat, and Slack for sure. So, what lies ahead?
Like the 50-70$ trading range in the oil market, equities seem destined for the same fate, at least in the near term. the downside is buttressed by a supportive and easing Federal Reserve, led by the non-committal Chairman Powell. The upside is capped by elevated valuations and weakness globally, with the likes of the UK (weakest pound in 10 years), Europe, and Asia struggling to find growth. All in all, investors have to look hard for value in a n effort to stay ahead of strong index performance. Nothing new there.
Global Economic & Financial Markets Outlook: Central Banks Play Chicken On Rates as Global Equities Continue A Strong 2019! (All country index data provided by WSJ.com, July 31, 2019.)
With trillions of dollars of bonds mired in the misery of negative yield, global fixed income investors are forced to trade in order to find profits. Central banks across the globe remain entrenched in the unprecedented policy of monetary easing. Equity indexes continue to benefit from a non existent relative competitor, i.e. negative yields versus 2% dividends on most major market indexes. In terms of absolute performance, the vast majority equity indexes across the world have returned anywhere from 10-15% or more during the first seven months of the year. Much of that is a make up of the poor fourth quarter in 2018, so the recovery just returned investors to where they were. Let’s take a look at a few company examples, shall we?
In Europe, the major indexes have seen gains of 8-15%. The FTSE, aided by a plummeting pound, is ahead by 16.78%. The DAX (Germany) gains are similar, at 15.44%. Citizens of France have more to celebrate than the Tour De France with the CAC enjoying a 16.66% return. Asia remains strong as well with the Shanghai composite up 17.48%, the Hang Sang inching ahead by 7.48%, Japan’s Nikkei rising 7.53% and Taiwan joining the party too, levitating +11.27%.
Looking forward, an interesting question will be the affect on country currencies of negative bond yields across the globe? Another important consideration is the potential inflation affects? When, where, how much, who suffers, and who might benefit? Certainly, issues to ponder.
The Art of Contrarian Thinking-How to Use Your Own Experiences to Invest More Productively! (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)
Have you ever read an article about a company and thought they had a really wonderful business and were well positioned for the future? Maybe you went on a trip and noticed how full the airline was, and the same might have held true for the rent a car company, now maybe the ride sharing entities. You may have taken a daily pleasure outing and experienced the thrill and excitement of an amusement park, helped by a travel recommendation site. Maybe your son or daughter is prepping for college or graduate school and you stumbled across a great app to pick that school, or help prepare for those grueling tests or curriculum. It could be a fishing trip, a parking garage, a new alcoholic beverage (spirit), wine, or beer, or yes, form of cannibas (CBD or THC). Not for me, but I get the medical rationale versus pain medication and those associated problems. Anyway, anecdotal evidence (known as personal experience) might be the best source of investment ideas for an investor. Yes, algorithms and artificial intelligence and cloud computing are all the rage, especially among big money institutional investors. However, when a sharp eyed individual who notices a full restaurant of happy customers, or a great app that gets positive reviews because of the ease of use, there is a very good chance an excellent investment opportunity is nearby. Remember to research the specific company to see if it is public, and certainly read its latest earnings report and quarterly filing. By doing the necessary research, you can use your own engagements to help produce investment returns which might be superior than the market.
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-Investing money in capital markets involves risk and could result in losing money. Past performance is no guarantee of future results. Future results are likely to be different from past performance. All equity portfolios involve risk and may lose money. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile, liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, attaining or holding the CFA credential in no way suggests performance will be superior than a market index or market return.