YH & C Investments Monthly Newsletter- March 2018 Edition #117

Economic & Financial Markets Outlook: Consumer Spending Lifts US. Economy As Inflation Concerns Test Investors!  (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 February, the Dow Jones Industrial Average fell 4.28%, the S&P 500 declined 3.89%, and the NASDAQ dropped 1.87%. When looking at the historical performance of domestic financial markets, other than the Great Depression being caused by tremendous leverage through borrowing, excessive inflation has been a major reason for prolonged periods of poor performance in the equity markets. The most obvious example was from 1973-1975 when the Dow Jones Industrial Average declined over 50% from peak to trough. When suddenly strong indications of higher wages and goods registered early in February, markets sold off hard. Although not all of the sell off should be attributed to inflation fears, for longer term investors, the inflation numbers bear continued scrutiny. If one looks at the combination of low interest rates, a large tax cut, GDP growth bumping up to the 3% annualized growth level, and traditionally low unemployment levels, it seems quite obvious inflation may be perking up, or potentially more troublesome, accelerating. Still, with deflationary forces like technology, overcapacity in real estate, abundant energy production, and retail competition all providing an offset to inflationary inputs, markets have since rebounded nicely from the sell off. What else is happening in the economy?

Conditions for mergers and acquisitions, freshly minted initial public offerings, corporate spin offs and recapitalization s, and more volatility in markets bode well for the financial sector. Consumer spending and confidence remain strong and with tax cuts starting to funnel more cash into the pockets of consumers, as well as billions coming home for companies from repatriation overseas, it is hard to not see the economy picking up steam for the foreseeable future. The eight hundred pound gorilla for stocks remains valuation as multiples in many areas are historically elevated. First quarter earnings have been solid as the large banks and technology leaders post record profits and have rock solid balance sheets. In sum, inflation seems to be the key area to watch for investors, along with the always unpredictable external events and predictable political dysfunction.

Global Economic & Financial Markets Outlook: With Interest Rates Headed Higher Across the Globe, Markets Are Slowly Adjusting! (All country index data provided by countryeconomy.com, February 27, 2018.)

The Federal Reserve has led global central banks to speed up the implementation of moving interest rates to traditional levels. Investors across the world are realizing the impact and changing how they approach capital allocation to reflect the higher borrowing costs. The buy at any price mentality has slowed down and selling, especially in markets where there is regulatory uncertainty, like Britain (Brexit length), has strengthened. Let’s take a look at some specific markets for examples, shall we?

As mentioned, the UK (FTSE) is down 5.18% year to date, while the German Dax has retreated 3.02%, Spain’s IBEX losing 1.41%, the Irish ISEA slumping 4.29%, and Swiss SMI shrinking 3.79%. In terms of positive returns, one has to look at regions tied to inflationary pressures, specifically commodities, and especially oil. Russia’s Mitex (+11.54%), Saudi Arabia’s TASI (+3.31%), and Kuwait’s KSW (+5.65%) are all prime examples. Looking ahead, it would be wise to pay attention to the fluctuations in currency markets to see how different interest rate policies are affecting exchange rates. The effect on capital markets could be quite dramatic.

The Art of Contrarian Thinking- Understanding A Long Term Horizon In the Context of Analyzing Specific Holdings In Your Portfolio!(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)

“I am a long term investor.” How many times have you read or heard that? Meanwhile, for many people, there are life events that pop up which need to be funded. A room in the house needs to be restored. A kid needs a car (good luck with that). College tuition is due for your twins (they worked hard to get into an Ivy League). You get the idea. These events need to be funded, which is why you invest, to grow your capital to handle these life events. Over a long period of time, the growth of your portfolio is related to the expansion capabilities of the companies you own. Businesses grow either organically (through existing operations), acquiring other companies, or some combination of both. The important question becomes how long do you have to wait for the growth, and how much growth is there. Each situation is different as small companies can and should grow faster than larger entities. A turnaround takes more time as a ten billion dollar organization than a five hundred million dollar one. My own feeling is you have to give companies three to five years, but you should see operational results start appearing one or two years after you plunk down your hard earned dough. I have made the mistake of waiting too long, sometimes over a decade, for results to show up. Don’t make the same one, but be patient and analytical in assessing whether a company is progressing according to its plans and more importantly, your expectations.

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.

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