|Index/Asset||March 2021||1st Qtr 2021|
Jan 2021- .917%
|U.S. Dollar Index||1.01%||3.30%|
U.S Economic & Financial Markets Outlook-Vaccine Rollout Helps Confidence As 10Yr Rises on Inflation Fears! (Return figures in this section come from the December 30, 2020 edition of the Wall St. Journal. 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 March, the Dow Jones Industrial Average gained 6.62%, the S&P 500 grew 4.54%, and the NASDAQ inched up 2.8%. For the first quarter, the Dow gained 7.8%, the S&P 500 floated 5.8%, and the Nasdaq advanced 2.8%. In case you were not familiar with finance theory, the worth of any asset is the future value of its cash flow discounted back to the present period. As such, with nearly any asset and especially equities, the discounting mechanism is interest rates (it is in the denominator). If the discount rate gets bigger, holding the numerator constant, values must drop. Applying this to the current market status, the rate on the 10 yr. treasury note rose to 1.72% from 1.45% in March, and technology stocks have come under pressure. With higher multiple stocks, much of their value is attributed far into the future where cash flows are inherently more uncertain, potentially wildly so. As rates rise, those multiples are called into question.
On the macroeconomic front, the Covid vaccine rollout continues to pick up, and as more of the country receives their shot (now at 100 million administered), confidence steadily increases. Health and government officials are motivated to accelerate the rollout to mitigate the spread of the various emerging strains of Covid. Industries which continue to hold up well include housing, automobiles, cloud computing, software of all kinds, health care, payments, and financial services. In the capital markets, the SPAC trend to have sponsors go public with a big cash pile in search of an operating business to merge with unleashed a torrent of founders looking to cash in on the opportunity. The biggest beneficiaries of SPAC popularity, as always, are the investment banks. They play matchmaker between private companies and those looking to acquire them (merge). The banks are also thriving with the explosion of financing by companies looking to raise debt capital because of the interest rate environment. The SPAC trend may be starting to fizzle as valuations of their equities have fallen significantly. It seems cash on its own doesn’t offer allure until a good, high quality business is secured.
On the equity front, technology multiples slid during the month, although many remain expensive relative to historical averages. For equities, the two big issues to focus on are the dollar and inflation. If either becomes problematic, and you can start with political dysfunction and fiscal profligacy as potential reasons, equities will face headwinds.
Global Economic & Financial Markets Outlook-Europe and Asia Post Strong 1st Quarter as Investors Start to Look Past Covid! (All country index data provided by countryeconomy.com, March 31, 2021.)
In the aftermath of a touch economic environment in 2020, the first quarter of 2021 shows the global investment community is still forward looking. Most equity indexes in the continents of Europe and Asia posted solid gains, think low to high single digits. With interest rates across the globe remaining quite low, in some cases at or below zero (Germany, France, Switzerland below, Japan at zero), the hunt for returns remains centered on equities. Let’s look at some first quarter returns of specific countries, shall we?
Western Europe proved fertile hunting ground as Germany (+9.40%), France (+9.67%), Italy (+9.84%), Spain (+6.46%), and the U.K. (+4.82%) all pleased equity holders. Turning to Eastern Europe, Austria (+14.11%), Bulgaria (+11.78%), and Romania (+11.88%) showed even better results. In Asia, China’s Shanghai lost .47%, Japan’s Nikkei gained 7.25%, South Korea’s Kospi lifted 6.84%, and Taiwan’s Taiex jumped 12.37%. Neighbor Thailand’s SET grew by 9.67%, while Singapore’s STI was flat. Other notable results included Saudi Arabia (+10.88%), South Africa (+13.26%), Canada (+8.13%), and Mexico (+8.35%). Looking ahead to the second quarter, the focus will remain on the Covid situation and how the continuing progress of vaccinations plays out. Clearly, investors believe it will ultimately prove successful and the economic environment will continue improving.
The Art of Contrarian Thinking-How Long Are You Willing to Wait For A Home Run Investment? (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)
A major reason for investing in stocks is to grow the value of your portfolio. A big piece of your total return is your investment approach. The more concentration in the positions, the more risk, but potentially more reward. The thesis behind concentration is to put more assets into businesses where you have strong conviction the returns will be the greatest. If you concentrate and are correct, your returns will often exceed index returns. An important question to consider when concentrating in positions is how long are you willing to wait for the company’s success?
The reason why I bring this question up is because businesses are often long duration assets. It means you must think in extended time frames, let’s call it three, five-, or ten-years’ time. You will often hear the term “long term investor” but having a decade long time horizon can conflict with the reality of non-existent stock performance. In many businesses, stock returns lie dormant for a long, long time. A management team works toward the long-term goals of the company and operational results show incremental improvement, if any at all. After two, three, or five years, many investors lose patience and sell the stock because they see no benefit to owning the asset. However, in a great many cases, being patient will see the business improve dramatically in one small time frame, think 50-100% or more. Once that takes place, investors suddenly notice the operational traction and the stock could very well have a huge jump. You see this frequently where a stock does nothing for five years, and in the sixth- or seventh-year doubles or triples. The real money is earned by having the patience to hang on when it seems nothing positive will ever happen. If you approach investing with a mindset that you need gains within a three-year time frame, you are going to probably be disappointed with most of your outcomes. One obvious other point is doing a great deal of research on companies before you concentrate your capital in a few positions, especially with their management teams. Your success is determined by the operators of the business, which is supervised by management. Quality management usually finds a way to solve operational issues and make investors happy.
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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)