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Y H & C Investments July 2020 Monthly Update- Edition 144

Economic & Financial Markets Outlook-As Equity Markets Recover Losses, the Economy Remains Troubled with Covid Flaring Again! ( 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 June, the Dow Jones Industrial Average fell 2.04%, the S&P 500 was flat (-.22%), and the NASDAQ advanced 4.87%.  In the last three months, the major indexes have all rebounded nicely with the Dow up 23.26%, the S&P 500 ahead by 26.55%, and the Nasdaq soaring 38.47%.  In as volatile a first half as we have seen in markets in a long time,  the Dow is down 9.48% year to date, the S&P off by a measly 3.22%, while the Nasdaq is king of the hill, rising 13.57%.  With June being the first month that the many states have opened, economic activity is slowly starting to rebound.  Unfortunately, with the sharp rise in Covid incidence taking place across multiple states (Texas, Arizona, California, Florida, Nevada), business and consumer confidence is suffering.  While it was natural that the number of cases would spike as restrictions were lifted, the ongoing issue will be how quickly the health officials can get the spread under control.  Secondarily, capacity constraints for service businesses will weigh on profitability until full-service levels resume.

A major issue weighing on the economy is the massive number of unemployed workers, which some estimate at nearly half the working population.  While the May jobs report showed gains of 2.5 million workers, and the most recent ADP report backing that up with another nice gain, continued progress will require sustained job creation of two to three million jobs per month for at least half of a year or more.   Only with consistent employment at these numbers will unemployment rates begin to retreat to something approaching terrible, let alone normal.

Clearly, the Federal Reserve and Treasury remain committed to providing as much support as possible to bolster the economy.  Their actions have obviously improved investor sentiment in both the credit and equity markets, and asset prices have dramatically recovered from the lows of March.  Next on the plate for both institutions is the looming Congressional negotiations on another aid package for citizens, businesses, municipalities, and states.  All need considerable help to avoid future job losses, bankruptcies, and business failures.  It is important for investors to watch the negotiations to see how extensive the aid will be.  The three trillion-dollar pipe dream the House passed is a wish list for Democrats which is just a starting point, and for many on the other side a key issue is incentivizing citizens to return to work.  The long-term feasibility of the government paying people more to stay away from a job than what they would earn at a position is not reasonable on any level, not for Republicans anyway.

In the markets, momentum investors have piled into Covid plays with the belief that the crisis is far from over and the prevailing leaders will remain dominant for a long time.  Some of the valuations are reminiscent of the internet bubble so any kind of a return to a more normal environment could see dramatic sector shifts in money flows.  On the political front, with four months to go before the election, it would be wise to expect the unexpected and volatility to remain high.  Again, pay attention, pay very close attention.

Global Economic & Financial Markets Outlook-Covid Crisis Keeps Global Markets Depressed as Countries Slowly Begin to Open! (All country index data provided by countryeconomy.com, June 30, 2020.)

The global economy remains at the mercy of the Covid pandemic.  Equity markets revolve around corporate profits, so the limited economic availability of many sectors continues to put a crimp on profits, and therefore, stock prices.  With Europe beginning to open its borders for limited international travel, there is the faint glimmer of hope of the start of a rebound.  With Covid spread still taking place in the United States and in large countries (like Brazil and Mexico) in South America, prospects for a return to a more normal environment remain muted.  Looking ahead, it is probably a reasonable expectation to not expect too much for most equity markets for the rest of the year.

As far as specific countries are concerned, outside the United States, most equity indexes are down anywhere from 10-15% year to date, especially across Europe.  In Asia, the range is wider but 10-15% losses are typical as well, with Japan’s Nikkei at -5.28% and China’s Shanghai losing -2.78% standing out along with New Zealand’s NZX at a -.36%.

The Art of Contrarian Thinking-Use A Variety of Investment Styles to Help Your Returns! (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)

Most investors in today’s market rely on passive investment in broad market indexes.  A different but similar version is to invest in mutual funds.  Many investment firms base their asset allocation models on a 60/40 split between stocks and bonds with some flexibility in those percentages based on the clients age and circumstances.  The younger the client, the heavier the equity weighting, and vice versa.  These passive strategies are traditional approaches to investing, but a broader use of investment strategies might help improve your investment returns.

First, to supplement your traditional equity investments, look at merger arbitrage, or buying positions around announced corporate transactions.  Usually, you buy the target and sell (short) the acquirer.  If there is a debt instrument involved with the transaction, you buy the debt (a convertible bond) and sell the acquiring equity short.  Another area to incorporate into your equity positions is reviewing country currency strength and weakness and the influence on strong companies which might be sold off because of the currency fluctuation.  A third possibility is to consider looking at exotic companies like special purpose acquisition companies, known as blank check entities.  Money is raised, put into a trust, and then used to buy an existing operating business.  A few companies which came public this way include Draft Kings, Virgin Galactic, and Del Taco.  There is a time limit on how long the capital can sit idle until the acquisition takes place, but it is another area for investors to look at.  All or any of these styles can help broaden the tactical and strategic approach of an investor trying to attain the best returns possible.  Thanks for reading the monthly newsletter.

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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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