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Y H & C Investments Monthly Review: June 2020- Edition 143

Economic & Financial Markets Outlook- Stocks Recover Most of 1st Qtr Losses As U.S. Economy Begins Reopening! ( 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 May, the Dow Jones  Industrial Average gained 6.99%, the S&P 500 rose 7.55%, and the NASDAQ advanced 10.77%.  The lingering question for investors in domestic stocks remains how robust an economic expansion will be, and perhaps just as important, how quickly it takes place?  With politics interjected because of different time frames of each state in reopening their economies, trying to ascertain how quickly the economy grows or employment figures improve is little more than speculation.  With the vast majority of enterprises small, concern about the recovery in bars, restaurants, and the travel and leisure space is at the top of the mind for analysts and regulators.  Making up nearly 20% of all jobs, the restrictions on capacity in these segments will have to undergo a serious analysis, or a complete rethinking, by regulators.  The longer these capacity guidelines are in place, the longer it will take for these job rich sectors to recover.  Some of these limitations are also tied to worries about potential liability by customers and employees.  If Congress can pass legislation exempting, or at the very least, minimizing payouts from Covid 19 lawsuits, it would remove a big concern of nearly all business groups.  Of course, the trial lawyers will want their say on the matter. Class action lawsuits are one  of the most profitable parts of the legal profession.  Another large question to consider on the legislative front is what kind of additional income supplement will be provided when the first unemployment money runs out at the end of July?  Currently, many people are receiving more money sitting at home doing nothing than they would be earning from their old job.  The incentive to work needs to be reestablished as a priority if the country wants employment numbers to rebound.

As for asset prices, any analysis of stocks relative to bonds must include the rock bottom interest rates of treasuries and any instrument associated with credit (especially LIBOR). The competing asset class doesn’t represent a high hurdle for stocks, and the interest rate justifies potentially higher multiples. On the downside is the poor state of affairs of the economy, especially for small businesses. Many believe public companies will ultimately earn fewer profits if the small business community and it’s workers are not able to recover relatively quickly. Confidence is crucial, especially in the previously mentioned service segment. Banks are flush with capital and have already started reserving fully for loan losses in their various credit areas (mortgages, HLOC’s, credit cards, commercial loans). With the summer travel season upon us, it will be important to watch this critical area of the economy for future hints about the how things evolve.

Global Economic & Financial Markets Outlook- While U.S. Stock’s Recover, No Such Luck for International Equities! (All country index data provided by countryeconomy.com, May 31, 2020.)

There is an old saying about how the rest of the world follows the United States when it comes to market direction, “When the U.S. catches a cold, the rest of the world sneezes.” If you invert the meaning and apply it to the current status of global markets, one should expect the rest of the world to follow the direction of U.S. equity markets, meaning higher. As of this writing, that has not taken place. Most global markets remain 20-25% below where they started the year. With nearly all major mature countries having interest rates close to or below zero, monetary policy by central banks cannot be any easier. The important question is recovery from the Corona virus pandemic and how long will it take? Market prices are saying the U.S. will rebound much quicker than the rest of the globe. More accurately, the profits of U.S. companies will bounce back quicker than international counterparts. Let’s take a look at the data for more clarity.

As a reference point, the Dow (-11.06% year to date), S&P 500 (-5.77% ytd), and NASDAQ (+5.76% ytd) all rose in May (6.99%, 7.55%, and 10.77% respectively). Looking globally, the UK’s FTSE fell .63% in the month and is down 19.43% for the year. Germany’s DAX gained 4.31% in May, but is also below it’s January starting point by 12.55%. The same pattern holds true for Spain, Italy, Portugal, and Greece (+.58%, -2.49%, +.46%, +1.66% in May, down -25.68%, -26.90%, -16.94%, and -28.81% for the year). Turning to Asia, sans China, which was ahead by 1.94% and only down 4.42% for the year, the same identity holds true. In Hong Kong (-6.83% in May, -18.55% for the year), India (+.28%, -21.27%), the Philippines (+4.03% in May, -24.12% year), and Thailand (+4.6%, -15.00% for the year) you see examples of the observation. Moving down under, we get a similar result in looking at Brazil (+5.0% in May, -24.12% year), Mexico (-2.03% in May, -17.04% ytd), and Chile (-9.14% in May, -21.89% ytd).

Looking ahead, with each region of the globe at a different stage of the Corona virus cycle, it is worth paying attention to international countries and their different approaches to reopening their economies. Sweden’s policies are not the same as Germany’s, which are different than the UK’s. Since the start of the year, paying attention remains our battle cry. I know, I’m really going out on a limb there, aren’t I?

The Art of Contrarian Thinking- Focus, Focus, Focus- You Only Need One ! (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 the middle of tough markets, an interesting behavioral finance observation seems to take place, at least from my perspective. You may notice commentary from fund managers about their opinion on the market or what stocks they are currently recommending. The great majority will say it’s too tough a market right now or the market is just still too expensive. Just as common is the always available, “The market has much more potential to drop a great deal more.” My point is you can always find reasons not to invest, especially when the environment continually reinforces to not buy. Instead of considering what others are doing or how they are approaching the market, a serious investor realizes their time is much better spent researching potential investments. In that task, there will be plenty of work. There are thousands of companies which are publicly traded in the United States, and many more thousands across other countries all over the world. You can invest in nearly all  major companies by buying global index funds or exchange traded funds. If you are willing to accept the market return, it is a solid approach to investing and has low costs. It also eliminates the work that needs to be done if you are investing in individual companies. However, the drawback is the inability to find that one company which can bring a 10X, 20X, 30X, or more return. It is very difficult to select and hold these, but you only need one in fifty years to make a dramatic difference in your financial life. Those who reinforce the mindset which distract you from the task at hand are merely a distraction you probably need to minimize. It’s best if you concentrate on what needs to be done, finding the one stock you want at the price you are willing to pay.

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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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