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Y H & C Investments August 2020 Monthly Update- Edition 145

Economic & Financial Markets Outlook-U.S. Economy Struggles with Corona as Equity Markets Helped by Fed Policy! (Return figures in this section come from the May 29, 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 July, the Dow Jones Industrial Average gained 2.33%, the S&P 500 rose 4.51%, and the NASDAQ grew by 5.27%.  As the United States progresses through the summer, the same problems plaguing it have become a little more pronounced.  Service based industries (bars, restaurants, hotels, airlines, etc.) are hampered by lack of demand and government regulations.  Many analysts fear what were thought to be temporary job losses now becoming permanent.  Like always, there are plenty of areas which are performing nicely.  In technology, the demand for cloud and enterprise services (networking, storage, security, payments) remains buoyant.  Housing is strong as buyers want residential abodes and investment properties.  Commercial buildings are attractive for all kinds of reasons, not the least of which is incredibly low financing rates.  With a high unemployment rate (15-25% unofficially), much of the working population is employed, though it remains to be seen how employment trends move through the balance of the year.

For many, the discussions between the House and Senate regarding a second stimulus package will help determine how quickly consumers, businesses, cities, and states are able to recover over the next few years.  Some believe consumer spending will drop off dramatically if Federal unemployment payments do not come close to the six hundred dollar per week level passed in March.  From a longer-term perspective, paying people more to sit at home than if they were working is not a sustainable solution.  The key consideration for both parties is the November election.  Both sides do not want the issue used against their party.  With respect to the election, the stark contrast between economic plans of the parties is dramatic.  On nearly every policy, from taxes, banking, health care, energy, the environment, regulation, and foreign policy, there are massive implications based on which side prevails in November.  Moreover, the composition of Congress is just as important.  It is important to understand any split of Congress will just result in the same partisan acrimony.  One could easily make the case the tension will be worse because of how events have unfolded this summer.

From a market perspective, the Fed’s unconditional support of capital markets has been a port in the storm of the corona virus effects on the economy.  The Fed’s unprecedented use of its balance sheet and the massive government stimulus (5 trillion worth and counting) has resulted in  immediate consequences in market psychology.  Economics is unique in that  every action has a consequence.  We are seeing this play out with the weakness in the dollar as investors believe there will be more stimulus to help the economy recover.  Gold and silver prices have rocketed higher, and some large institutions, namely Goldman Sachs, question the ability of the dollar to remain the world’s reserve currency.  A different administration will add fuel to that fire.  2020 is a year where investors must pay very close attention, and nothing about that will change over the next five months.

Global Economic & Financial Markets Outlook-European Union Issues First Debt to Support Corona Recovery as Global Markets Remain Listless! (All country index data provided by countryeconomy.com, July 30, 2020.)

 With the European Union issuing it is first bond package backed by the entire union (as opposed to one country), the new debt instrument is a case of necessity being the mother of invention. Realizing the entire continent needs a great deal of assistance to try and dig citizens out of the difficult economic environment, the EU will spend nearly one trillion Euros to support those efforts.  The money is focused on helping many of the southern countries (Italy, Spain, Portugal, and Greece), but all Eurozone members need help (sans Germany).  The southern countries forever seem to be needing assistance.  From a finance perspective, the more important consideration is the ability of the EU to finance itself in the future in a similar manner.  With the dollar weakening, some see this as a permanent strategy to bolster a unified Europe, and the next step may be fiscal authority as well (taxing capability).

As far as equity index performance is concerned, most of the globe outside the United States is down five to ten percent for the year.  The Eurozone countries typically have lost ten to fifteen percent during this time frame.  In Asia, other than China, most country indexes are underwater from 15-20%.  Looking ahead, the primary task for all countries is controlling Covid spread.  As case numbers hopefully drop, government restrictions can begin to loosen, and consumer and business confidence may rise.  The game plan is simple, but as of this writing, the world is waiting for it to occur.

The Art of Contrarian Thinking-Thinking for Yourself: Will Corona Permanently Change Consumer Behavior? (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)

Each person sees the world through their own eyes.  Investing requires making decisions about the future.  If you accurately assess behavior, it has huge consequences on the results of your capital allocation strategies.  Specifically, it could dramatically affect your investment returns.  The corona virus pandemic now forces each investor to look at changes in the business world.  A few easy areas to ponder are consumer behavior in travel, airlines, hotels, bars, restaurants, and casinos.  Many believe the work at home trend will cause companies to use far less real estate, especially office buildings.  Clearly, commercial real estate is an area which would suffer severe dislocation if the work at home trend is permanent.  One thing to consider is we are currently in the middle of the pandemic, with plenty of data indicating we are at or near the bottom.  At some point, the world will move beyond this terrible ordeal.  Investing is about the future, not the past.  It is always good to make decisions without anything influencing your critical thinking.   As an example, you do not decide to run a marathon after you run a mile.  Similarly, believing the next five or ten years will all be based on how the public is behaving today could have plenty of erroneous assumptions.  Right now, technology is firmly in charge of markets.  Whether that trend holds for the next decade remains to be seen.  Investors who calmly and rationally think the future through could be rewarded immensely by not placing too much emphasis on the current environment.  Thanks for reading the monthly update, I really appreciate it.

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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)

 

 

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