Economic & Financial Markets Outlook-U.S. Economy Slowly Starts to Recover as Investors Eye Debates, Election, and Covid Vaccines! (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 September, the Dow Jones Industrial Average fell 4.53%, the S&P 500 dropped 6.08%, and the NASDAQ retreated by 7.37%. With three quarters of the year behind us, the Dow is down 2.65%, the S&P ahead by 4.09%, and the Nasdaq up a startling 24.46%. As the United States continues to try and navigate the Corona virus crisis, stops, and starts characterizing the country’s progress. A Jeffersonian (decentralized) approach, both it’s strengths and weaknesses, is the structure the President chose to contend with an unprecedented public health matter. Economically, after seven months of trying to overcome the various issues, there are many different opinions about how the crisis is being managed. Unemployment remains high, above 8%, though the number is much improved since the 15-20% levels seen at the depths of March. We are all aware of the industries which have suffered the most from Covid (travel, airlines, lodging, food, and beverage). Housing and health care have held up reasonably well, while energy and the banking sector continue to face serious challenges.
A great deal of commerce has accelerated directly to internet-based transactions. Corporations are rethinking their approaches to all segments of their businesses. With analytics and cloud-based technologies having low penetration rates across the corporate sector, the next few years are a huge opportunity for nearly every business to reimagine their processes.
With respect to business conditions, the United States continues to enjoy record low interest rates (10-year Treasury at .68%), very cheap energy prices, and a banking sector which is extremely well capitalized. A robust IPO market continues to attract capital because of strong 2020 performances by freshly minted candidates, most recently Snowflake and now Palantir. The bond market remains attractive for corporations looking to borrow money for any kind of legitimate financial opportunity. Investors see the upcoming elections as a continuing reason for concern, as well as the lack of progress versus the Covid disease. As for valuations, September took some of the froth out of the high-flying Nasdaq names. Many remain far ahead of business fundamentals, so caution is certainly warranted in those hot areas. Tax loss selling is now upon us, so the next few months promise to be interesting. At the very least, there will be plenty of action. As we keep saying, pay attention, pay close attention.
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, September 30, 2020.)
The Covid pandemic continues to make owning global equities difficult. Of the eighty-six country stock market indexes listed by countryeconomy.com, only twenty-five were positive, 29%. Conversely, it means nearly three quarters of global indexes currently have losses for the year. Just as active investing traditionally underperforms passive ownership, trying to pick specific countries out of the globe looks like a low percentage bet. Still, in a market where global economies have been ravaged by the pandemic, it is understandable why investors remain scared of risk assets.
Most losses across the indexes are in the ten to twenty percent range, especially in Europe. With the FTSE off by 22.17%, Germany’s DAX down 3.69%, and the CAC 40 of France off 19.65%, you can see Europe’s investors have had a tough go of it. In Asia, China’s Shanghai index is ahead by 5.51%, while Taiwan is up 4.32%, and Hong Kong retreated 16.78%. India’s Nifty falls 7.57% to complete a look at some of the major countries in the continent. Some unique outliers across the globe include Denmark, up a lovely 19.76%, South Africa’s JSE, up 2.43%, and Finland, up 1.40%.
Looking ahead, with nearly fifteen trillion of negative yielding bonds dotting the globe, central banks are committed to low interest rates for the next few years. There should be no expectations of tightening and most markets remain focused on Covid developments.
The Art of Contrarian Thinking-Understanding Your Specific Thesis and How Long It Will Take to Play Out! (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)
Investing in specific companies means understanding exactly what a company is trying to accomplish and how long it will take. Each situation is different and requires a thorough analysis of where the business is today and how it will grow over the next year, two, or three. My experience usually finds the best management teams are focused on executing over the short term, and planning the long term based on results from their recent performance. Great management teams leverage learnings now to improve business in the future. Leadership teams look at a wide variety of key performance indicators to concentrate on. Some prioritize sales growth, while others see more opportunity in margin expansion. There are a few which have vast experience in financing and deal structure to help their acquisition strategy. Organic growth should be a priority for most leadership teams. None of these skill sets are mutually exclusive, but great leadership groups engage in all these areas. Very few companies excel in all these important facets of leadership, which is why there are so few great companies out there. My job as an investor is to analyze where the business is today, what the focus is, and how long it will take to play out. One last point, with the Covid crisis affecting so many pieces of the economy, your time horizon on how long anything for a business will take should be extended out a year or two. Over the long term, if the company is good, the extra waiting probably will not matter a great deal to your returns.
If you would like to receive all Y H & C Investments blogs and monthly newsletters, please share your information below-
(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)