U.S. Economic & Financial Markets Outlook- Consumer Remains Strong As Holiday’s Arrive: What Will 2020 Bring? (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 November, the Dow Jones Industrial Average gained 3.72%, the S&P 500 increased 3.40%, and the NASDAQ rose 4.5%. With one month remaining in a strong 2019, the crucial question of what happens to the economy in 2020 is front and center. If you recall, heading into 2019, the last quarter of 2018 was frightening for investors as markets fell nearly 25% during those three months, the Federal Reserve announced interest rate hikes in prior meetings, and many economists called for the U.S. economy pulling back. With a strong decade of economic expansion, it certainly makes sense to think nothing lasts forever. If we investigate the key indicators of economic growth, most signs still are constructive. Inflation remains muted near 2% annually. Interest rates have been at rock bottom levels for quite some time and seem stuck below 2% as the ten year Treasury bond currently sits at 1.79%. Auto sales and housing starts are solid, with housing having plenty of room for improvement, especially for starter homes. Energy prices are manageable, and banks remain well capitalized with balance sheets nicely reserved. All point to the idea of an economy which should continue to chug along with annual growth somewhere near two or two and one half percent with quarterly fluctuations depending on unique events or unforeseen circumstances. So what are the other actors which might disrupt this thesis?
First, the manufacturing area remains concerning because of the lack of confidence about capital spending. The trade talks and minimal clarity around a variety of issues (tariffs, investment restrictions, intellectual property, government ownership thresholds, currency manipulation and float) weighing down investor psychology. The wide and ever growing polarization on political issues probably only expands as the election approaches a year from now. Investment banks and other institutions see a wide range of potential election outcomes, with the leadership and composition of the next government totally unpredictable. The other question for market participants is valuation, which is seen as a little elevated. In sum, the new year appears to be encouraging, provided you are able to withstand the stomach churning volatility related to politics and unknowable exogenous events. Regardless, the unpredictability certainly makes it, uh, interesting.
Global Economic & Financial Markets Outlook- Interest Rates and Quantitative Easing Remain the Story As Low Yields Boost Global Markets! (All country index data provided by countryeconomy.com, November 30, 2019.)
In financial markets, interest rates play a huge role in determining the value of assets. As the powerful central bankers across the globe have embarked upon the strategy of pushing down interest rates in many countries, the action has boosted the prices of financial assets. It is important to note there are other factors which help determine the perceived value of these instruments: inflation, growth rates, balance of trade, net investment, and debt levels among the most critical. Still, if we just looked at the nominal level of interest rates and stock market performance, you could easily draw the correlation between a low (even negative) level of interest rates and equity market returns. Let’s take a look at some of the data for a few examples to illustrate this simple idea.
Country Japan Germany Switzerland France US
10 Year Bond Interest Rate -.08% -.08% -.64% -.04% 1.75%
Equity Market Return +16.3% +25.36% +24.51% +24.99% +20.73%
Do you notice a pattern? Me too. A few other countries to consider when looking at this relationship include China (10 yr 4.2%, equities +15.16%), India (10 yr 6.46%, equities +10.99%), Australia (10yr 1.04%, equities 21.25%), Mexico (10 yr 7.31%, equities +3.51%), Philippines (10 yr 4.0%, equities +3.66%), Greece (10 yr +1.44%, equities +46.71%), and Russia (10 yr +6.5%, equities +23.56%). Let’s be clear, it is too simplistic to take one variable like interest rates and draw an accurate correlation to equity market returns, but it does highlight the basic premise of low interest rates across the world helping asset prices. Adding inflation to the mix would make this analysis more interesting. For investors, paying attention to these important variables going forward might be worth your time.
The Art of Contrarian Thinking- Why Patience Matters. The Latest Market Darling, Marijuana Stocks, Drops Out of Favor After Flying High For Years! (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)
Patience and investing are tied at the hip if you are trying to achieve the simple task of getting the most you can for your money. Today, many investors believe that using momentum data, sometimes called trend following, is a better approach than waiting patiently for lower prices. “Only buy when they go up” is the basic philosophy we are referring to. My own feeling is for some investors this may be the optimal approach, but not for me. A great example of why being patient and waiting for your ideal situation (in terms of price) would be what has taken place with marijuana stocks over the last half of a year. Long the market darling, marijuana stocks have been crushed to the tune of losing $35 billion dollars of value for the top fifteen companies in this area. Here are a few ugly examples: Canopy Growth drops from 42 to 18, Tilray from 50 to 19, Cronos Group 17 to 6.5, and Aurora Cannabis moving to 2.5 from 8. You can see these are huge losses for any shareholder of these entities. Wall Street has long bid up the prices of companies which need to do financings, especially in new industries which have questionable business models and little legal clarity. Certainly, if ever there was a poster child for both of these categories, the marijuana industry qualifies. None of these businesses is stable in terms of a long term ability to operate a functioning business that generates cash. If you see these kinds of entities, you can always afford to sit back and watch events unfold before you even consider investing your hard earned money. With capital usually quite precious for anyone, you don’t have to rush into speculative or questionable situations. By being patient, even now, you can bide your time and save your dollars until you find a company that meets your purchasing criteria. Maybe it’s pot, maybe it’s not. What is for me is patience and discipline in how to approach investing, and hope you will consider doing so with your investments. Thank you for reading the monthly review and I hope you enjoyed it.
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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)