US Economic & Financial Markets Outlook: Markets Slump As Tariffs, Technology, and Trump Combine to Shock 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 March, the Dow Jones Industrial Average fell 4.31%, the S&P 500 declined 4.99%, and the NASDAQ dropped6.54%. For the first quarter, the results were similar with the Dow losing 4.08%, the S&P retreating 3.85%, and the Nasdaq fading 1.67%. Typically, when the largest global economy (the US) is growing GDP at nearly 3.0% per annum, investors would view this favorably. Similarly, if consumer spending is strong (it is), inflation is contained (yes, below 2.0%), corporate profits are robust ( S&P will do close to $150 for the year, up over 15%), tax rates are low (recently chopped), and the capital markets are full of merger and acquisition opportunities, one would expect equity markets to trend higher. Some of these strong macroeconomic statistics should impact the mood of investors, yet during the first quarter of the year, this was clearly not the case. The question is why, and will the negative perception continue?
Markets often take a Jekyll and Hyde personality based on all kinds of short term situations. Over a long period of time, however, economic fundamentals usually overcome sentiment based on non sustainable, one time events. Political rhetoric and actions would fall into the latter category, and while the current US. administration brought trade policy into the forefront of market concerns, right now the idea that trade wars will escalate among the largest, mature, trading economies probably remains fanciful, if not premature. This is not to say that trade policy is insignificant, no, but with global supply chains linked across multiple borders in many industries (particularly heavy, like autos, energy, machinery, and defense), the idea the logistical efficiency built up in the corporate world is going to change makes little sense. As a result, my feeling is given the well established structures in place, most companies will not see their earnings power diminished by new trade policies. In some cases, depending on the specific actions, there will be companies clearly affected, but on the whole, I suspect very little difference in the short and intermediate time frame. However, given the poor performance of the equity market, investors have clearly reconsidered the overall weighting and valuations placed on market leaders in technology. I suspect a shift to a lighter emphasis on technology and a broadening of investor capital would probably a good thing for markets.
Global Economic & Financial Markets Outlook: Tough 1st Quarter for Global Markets As All Regions Go Red! (All country index data provided by the Wall Street Journal April 2, 2018.)
One of the interesting dynamics of equity markets is there is constant change. Just because last year was good in nearly every nook and cranny across the globe does not mean this year will turn out the same. Indeed, so far in 2018, equities have struggled in North America, Europe, Asia, and South America. All regions show negative returns ganging from -1 to -7% with the average being about -3 to 4%. The most severe losses are found in Asia, with Japan’s Nikkei down 6.9%, the Shanghai Composite losing 4.5%, Australia falling 5.0%, the Philippines PSEI dropping 6.1%, and the Indian Sensex fading 2.4%. Taiwan (+2.3%), the Thailand SET (+1.6%), and Singapore (.8%) were noteworthy with positive returns. Europe’s strongest country, Germany lost 6.4%, as did Poland (8.4%),Switzerland (-6.8%), and the UK (-8.2%).
Looking ahead, a key issue to consider remains the shifting policies of the global Central Banks. More specifically, the winding down of nearly a decade of quantitative easing and how the move towards interest rate normalization will impact global markets? How extreme the effects will be, when they take place, and the nature of the second and third tier reverberations from tightening are all questions investors will grapple with during the balance of the year.
The Art of Contrarian Thinking- Hanging In There When the Market Corrects- Focus On the Strength of Your Holdings!(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)
With the market undergoing a tough patch during the last quarter, I thought it would be constructive to think about how to stay focused on what is important during these downturns. In my mind, what is crucial is to be informed about how your holdings are operating. One of the most difficult parts of investing is when you own companies where the underlying business is performing quite well, yet the stock does nothing, or even more trying, goes down (maybe even a lot). In trying markets, it may be the case that your company(s) are growing at 20% or more, and still the stock doesn’t budge, or retreats. Margins are expanding? Great, the stock still does nothing. The company made a good acquisition or refinanced their debt at a better rate with longer maturities, or added a popular new product line. Zip, nada, zilch. No reward for months, maybe even a year. Welcome to a tough market, but also an opportunity. All of these situations are indicators your company is doing the right things, and at some point, and you won’t know when, you will get rewarded by owning the stock. Tough markets don’t last, tough companies and persistent, mentally tough investors do. If the company is executing well, hang in there, you are on the right track. Last, sorry this month’s letter was a bit tardy, family vacation time called. I will try and make sure it does not happen too frequently. Thanks for reading this week!
Disclosure
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.
