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Economic & Financial Markets Outlook-United States Economy Slowly Recovers as Covid Spikes Again While All Eyes Turn to the Election! (Return figures in this section come from the September 30, 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 October, the Dow Jones Industrial Average fell 4.27%, the S&P 500 dropped 2.34%, and the NASDAQ gave up 1.48%. The U.S. economy continues to face serious challenges with the spikes in the Covid 19 virus. Even with the pandemic issue in full force, business activity continues to improve as weekly jobless claims trend downward below 750k and the unemployment rate dropped below 8.0%. While second quarter GDP saw a record decline of 32%, the third quarter snapped backed nicely with a 33% increase, so the country is coming back, other than the specific problematic industries we are all quite familiar with.
Looking at segments of the economy which continue to show strength, health care, housing, automobiles, and internet-based industries like software, security, and payments have all held up well over the last six months. As far as economic conditions are concerned, energy and interest rates remain at rock bottom levels with oil at 35$ per barrel and the ten year treasury yielding .86%, which is actually higher than it has been for the last few months. On the corporate earnings front, after three weeks of financial results, most major companies are exceeding estimates. Of course, much depends on the specific company as to how investors interpret their figures. Anything related to consumer spending- specifically travel, lodging, dining, or clothing, is viewed with the highest skepticism. Double that for companies in the energy or banking areas. Those industries are shunned for specific reasons, with some of it relating to the outcome of the 2020 election, now only a few days away. Let’s turn to the election and potential implications, shall we?
Currently, the general view of investors is ex Vice President Biden will replace Donald Trump as President. Most of Wall Street believes Democrats will narrowly take the Senate as well, giving the Democratic party control of both houses of Congress and the Presidency. From an investment point of view, a Democratic sweep is seen as ushering in a massive fiscal stimulus package in the first year with tax hikes for corporations and the extremely wealthy also on the table. In the event of a split Congress, one can assume zero cooperation from the party not in control of the Presidency. The important point to consider is the entire context of the results and what they mean from a policy perspective. The other key point to emphasize is to not let politics impact the kind of long-term decisions you make for your portfolio. No one knows how the election plays out, and it may take a while to know the results. Keep calm, wait for the end result, and think about how it can impact the businesses and assets you own. Ultimately, investing is something to think about over 5, 10, 20, 30 years or longer, so while a four-year political cycle will have an impact, a well-structured portfolio should be handling the political results.
Global Economic & Financial Markets Outlook-World Equities Hurt by Covid Wave in Europe As Most Indexes Remain Deep in the Red! (All country index data provided by countryeconomy.com, October 30, 2020.)
As has been the case for all of 2020, the Covid crisis continues to negatively affect global equity markets. The reaction of equity investors seems to have little to do with traditional countrywide economic analysis (interest rates, negative yielding fixed income assets, differentials in inflation rates, growth rates of GDP, net current accounts, etc). What we do notice is a tentative relationship between countries where Covid is believed to generally be contained and somewhat stable capital flows relative to where the virus condition is believed to be problematic (potentially elevated or spiking). From a long-term perspective, if one assumes an impending Covid vaccine (or several approvals), hard hit countries could present an opportunity to purchase at discounted prices to equity value. Naturally, traditional analysis and due diligence apply to each situation. That being said, let’s look at some specific country performance, shall we?
Europe is in the eye of the storm, with Germany’s DAX down 12.77% year to date, France’s CAC off by 23.15%, Spain’s IDEX losing 32.43%, Greece’s ASE retreating 37.87%, and Portugal’s PSI falling 24.34%. The UK’s FTSE has lost 26.05%, and Ireland’s ISEQ is a relative winner, only down 10.52%. Turning to Asia, China’s Shanghai index is ahead by 5.72%, Japan’s Nikkei losing 2.87%, and India’s Nifty is down 4.325. New Zealand’s NZX looks solid, gaining 5.16%, while Australia retreats 11.325%. The last two countries have extremely restrictive policies related to economic activity during the pandemic. Looking ahead, the world is anticipating vaccine approvals and the ramping up of production over the next six months. Let’s hope there is success and countries can begin seeing some progress in preventing the spread of Covid.
The Art of Contrarian Thinking-Using Y to Buy X- Getting into Long Term Positions Through the Back Door! (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)
Finding and investing in the highest quality companies is not something where investors get many great opportunities. It is very similar to a batter trying to hit against an All-star major league pitcher. Out of 20 or 30 pitches, one might be a good chance to swing and really connect. With investing in stocks, the best companies are not on sale very often. Once every decade, in many cases even rarer, you might get a good look at something you really want to own. These chances can be worth quite a bit of money, especially if you are correct on the quality of the business.
One strategy to consider is to look at corporate transactions where a great company, X, is buying another company, Y. Usually these transactions are all stock deals where X buys Y and the shareholders of Y wind up with X stock. In some of these cases, X’s stock gets sold because the transaction is thought of negatively by risk arbitrageurs who specialize in merger and acquisition investing. Often, they buy the acquired company and sell the acquiring entity. In this scenario, the opportunity is buying X. In other cases, company Y’s stock is priced where investors don’t believe the transaction will get completed. In this situation, you can buy Y and if the purchase by X does finish, you will wind up with the stock of X. In some cases, you will get X stock plus cash. The important issue is does the deal get completed and what price did you buy Y at? Maybe more consequential is X must be a company which is well positioned to grow and have an excellent competitive position. Over the last twenty years, there have been several instances where we have used this strategy to find entry into excellent companies. You might consider doing the same the next time you see a merger situation you find intriguing. Thanks for reading the monthly update!
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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)