|Index/Asset||June 2021||2nd Qtr ||1st 6 Months|
|10Yr Treasury Jan 2021-.917|
June 30- 1.4430%
|U.S. Dollar Index||-2.07%||-.58%||+2.74%|
U.S Economic & Financial Markets Outlook-! Is the Fed Accurate About Transitionary Inflation? (Return figures in this section come from the June 30, 201 editions 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)
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In June, the Dow Jones Industrial Average lost .28%, the S&P 500 gained 2.12%, and the NASDAQ lifted 5.43%. Year to date, the Dow is ahead 12. 73%, the S&P 500 has advanced 14.41%, and the NASDAQ split the difference, rising by 12. 54%. The crucial area investors will focus on over the next six months is inflation related data. Historically wage inflation makes up most inflationary components (80%). As such, federal and state legislation raising minimum wage limits will be heavily scrutinized. Contract negotiations among large employers which lock in persistent salary increases, which may include cost of living adjustments (COLA), are also part of the inflation watch list. Government leadership usually has the job of maintaining a fragile balance between the country’s economic stewardship and political survival. With the investment community increasingly worried about growing inflation data points, financial officials must continue to emphasize a transitory message. Technology trends like more powerful and consistently cheaper semi-conductor and storage industries underly the deflationary argument, as does low-capacity utilization across the industrial landscape. The other part of the Federal Reserve and Treasury Department’s mission is to parrot the current administration’s emphasis on social goals. As an example, the current SEC head indicated he will also add social objectives to his job of overseeing financial markets. Government officials can pursue idealistic objectives when financial markets are rising and doing well. If markets were to turn down, well, investor focus might become much more concentrated on economic fundamentals versus progressive idealism.
Turning towards existing market conditions, with the ten-year treasury bond sitting at 1.44% and inflation on the rise, real rates of return in U.S. fixed income issues are negative. The same holds true for cash, cd’s, and most money market mutual funds. In the equity markets, the government has blessed the largest financial institutions to return large amounts of capital back to shareholders through increased buybacks and dividends. With IPO and merger and acquisition activity at healthy (maybe frothy?) levels, well capitalized banks bolster strong equity markets. If one views the reopening of the country as more leverage to a very profitable corporate sector, the equity market appears to be the most attractive place for capital (as has been the case for a long while). The major issue with stocks, and it has been the same situation for decades, is what are you buying, why, and what price are you paying? Like a sunny summer day in Las Vegas, nothing new there.
Global Economic & Financial Markets Outlook-With Half of 2021 Complete, World Stock Markets Recover from the Covid Shock of Last Year! (All country index data provided by countryeconomy.com, June 30, 2021.)
While the Covid crisis of 2020 remains entrenched in the fabric of the global economic system, equity markets across the world have recovered strongly in 2021, at least halfway through the year anyway. Most global stock markets are up between ten and fifteen percent, through June 30, 2021. Geographically, the return is specific to the region and country. In Europe, most equity indexes have returned around 15%. The Western European countries like the UK, Ireland, France, Spain, Portugal, Greece, and Germany range from a low of 3.78% in Portugal to a high of 18.30% in Germany. In Eastern Europe, the results are similar with stronger outcomes in Bulgaria (+24.74%), Austria (+24.16%), and Romania (+27.05%). Turning to Asia, there is less strength with Japan’s Nikkei (+4.91%), China’s Shanghai (+3.40%), the Philippines PSEI (-3.33%) and Malaysia (-4.85%) displaying investor skepticism. Stronger countries include South Korea’s Kospi (+14.73%), Taiwan (+20.56%), and Thailand (+9.80%).
Turning to Africa, India, and the Middle East, India (+12.64%), South Africa’s JSE (+11.28%), Saudi Arabia (+26.55%) and Israel’s TA-35 (+12.59%) show nice gains, while Turkey (-7.11%) and Egypt (-6.66%) have struggled. In North and South America, Canada’s TSE (+16.96%), Brazil (+16.98%), and Mexico (+14.23%) have been solid while Columbia (-17.92%) and Venezuela (-99.62%) remain, shall we say, questionable at best.
Looking forward over the balance of the year, an upswing in the commodity cycle seems to bode well for the large producing countries of energy and raw materials. Caution regarding the emergence of new Covid strains and the slow global rollout of vaccines remain obstacles for a faster economic recovery. Look for the same central banking prescription of rock bottom interest rates combined with purchases of debt instruments as the way to soothe financial fears. The key question of inflation remains one to keep your eyes on.
The Art of Contrarian Thinking-When Stocks Are All the Rage, Beware of Ease and Overconfidence! (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)
When you watch people at the highest levels of their profession, they often make what they do look easy. A great writer, musician, actor, athlete, or politician performs at such a high level that the world believes their craft is simple and can be performed just as well by anyone. Investing in stocks during buoyant periods can be seen as an easy way to make money. Remember at the start of the year when the meme stocks were going up 20-50 points a day (often hundreds of percent)? Those kinds of situations are misleading because they create a false impression that all investments are destined to go up. Remember Dave Portnoy’s quip,” stocks only go up?” Let’s be clear, ten baggers are rare. Five baggers, too. Three-baggers, yup, those aren’t easy, either. In fact, one of the characteristics of talented investors is they have skepticism. They are always questioning their analysis. Overconfidence might be the biggest no no there is when it comes to the psychology of investing. Yes, you want to be positive about what you buy, otherwise, why buy it? You gain confidence by the research you do to understand the quality of the business you own. You understand the reasons why you want to own the stock and have a realistic time frame about when you can expect the business to do well. Overconfidence comes from a fake sense of the business quality and an unrealistic appraisal of the business. Markets are brutally efficient and only the highest quality companies are rewarded over a long-time frame. In that regard, you might keep in mind less than five percent of all listed stocks outperform indexes (greater than three years). Stay cautious and positive but be very skeptical of buoyant investor attitudes.
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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)