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US Economic & Financial Markets Outlook: Fourth Qtr GDP Revised Down to 2.2%, While the Yield Curve Inverts! (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 lost .28%, the S&P 500 rose 1.10%, and the Nasdaq gained 1.76%. For the first quarter, all major indexes fared well as the Dow rose 12.43%, the S&P 500 gained 14.03%, and the Nasdaq increased 17.39%. With major equity indexes strongly rebounding from the fourth quarter drubbing, investors will turn their attention to the economy and whether the inverted yield curve indicates an imminent recession will be the ultimate result. Next, and maybe more important, will be first quarter earnings reports. Economic conditions remain ideal with interest rates and inflation muted at low (2.5% on the ten year treasury note) and lower (inflation less than 2.0%). With the Fed on hold for the foreseeable future, one would imagine that merger and acquisition activity would continue to be strong, and could really heat up, setting transaction records similar to the 2017 numbers.
The IPO market has a healthy pipeline of high profile companies lined up and ready to go public. Names like Lyft, Uber, Pinterest, AirBNB, Slack, and Palantir are all familiar with the investing public and could provide more interest in the broader equity market as well. The housing and car areas have been segments facing major headwinds over the last year because of the rising interest rate environment, but now that the Fed is on hold, those sectors could see some improvement as well.
With spring, baseball, and tax time rapidly approaching, the difficult weather of the first quarter will hopefully be behind the country, and retail also could benefit from warmer temperatures, as could travel. Oil is almost always helped by an increase in driving miles as refiners run their plants to maximum capacity. In sum, I would expect to see the US economy show stronger growth in the spring and summer quarters. Take the prediction with a grain of salt, however, as macroeconomic forecasting is very much a fool’s errand. As for markets and valuations, we are pretty much back to where we were three months ago, looking at 17-18 times forward earnings. Certainly, equities are not cheap, but not expensive either. Caveat emptor.
Global Economic & Financial Markets Outlook: China Leads World Makrets Higher As Equities Rebound Across the Globe! (All country index data provided by countryeconomy.com, March 30, 2018.)
As the final quarter of 2018 was a difficult period for equity investors all over the world, in a complete reversal, the first quarter of 2019 has seen stocks rebound in every geography. Leading the way is China, by a substantial margin. Consider this, the Dow Jones China Index and Shanghai Composite Indexes were up 27.7% and 23.8% respectively, over the last thee months. The next best performing global stock index (outside of the United States) was Italy’s FTSE MIB, which leaped only 16.2% (for context, the Nasdaq was up 17%). So the major indexes in China had great quarters, and Hong Kong’s Hang Sang also performed nicely, up 12.4% for the period. Elsewhere in the east, Japan’s Nikkei grew 6%, the Philippines PSEI expanded 6.1%, Thailand’s SET rose 4.8%, and Taiwan’s Weighted Index gained 9.4%. India came in at +7.2%, while the Kiwis (New Zealand) was a strong 11.7% in the black.
Europe posted solid figures, too, with most countries coming in around +10%. Specific examples include Denmark (+13.5%), France (+13.1%), Netherlands (+12.5%), Portugal (+10.0%), and Switzerland (+12.4%). The UK came in at +8.2%. Looking ahead, a lingering question remains how long Brexit will occupy the Eurozone , as well as the changing of the political guard across the European Union and how it might affect the attitudes toward European unity at the ECB? With the Federal Reserve pausing on interest rate hikes and many worried about a potential economic slowdown across the globe, it seems the long planned policies of normalization could be on hold for a while, or at least until better economic data shows up.
The Art of Contrarian Thinking-Why It Is Worth Holding Small Companies With Potential !(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)
If you have been investing in stocks for a long period of time, you come to realize that the market is full of a huge range of companies. A vast number of these entities are small, in many cases, less than one hundred million dollars of sales. A great percentage of these tiny enterprises may be new public companies or those seeking additional financing. Some may be concerns going through a very difficult time because of a debt laden balance sheet. In a great majority of these cases, there is plenty of risk in owning the stock. Your fate as a shareholder is often tied to a management team which is dependent on the founder and CEO. Obviously, these situations are not for the faint of heart and you need to have a great deal of faith in the quality of the business and management to buy into these companies. However, the reason why there is a logic in owning a diversified number of smaller listed businesses is the same reason that venture capitalists employ when they construct their portfolios. The math is simple as if you own ten companies and one goes bankrupt, eight do very little, and one makes you ten times your money, the one big winner pays for all the others and then some. If the big winner is a twenty, fifty, or one hundred bagger, your gains are probably going to be far better than just owning a broad based index. You need one out of ten to work, and there is a good chance most will not. The plan is a percentage based one where your success is determined by your ability to choose businesses that might grow to five, ten, twenty or more times the size you originally bought it at. If you get in at 20 million in sales and it grows to 100 million, you are probably going to have some success. It’s not easy, and it takes a great deal of patience and persistence, but if you are correct, the gains can come quickly through buyouts or just the natural growth of the company. You might keep these ideas in mind when you think about investing in smaller public companies. Thanks for reading the newsletter this month, I really appreciate it.
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.