US Economic & Financial Markets Outlook:1st Qtr GDP Comes In At 3.2% As Earnings Reports Bolster Market! (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 April, the Dow Jones Industrial average gained .81%, the S&P 500 rose 1.75%, and the NASDAQ grew by 1.95%. In any country, a good starting point for evaluating the economic conditions of an area is to begin by analyzing the current situation of the financial, energy, and health care industries. Any capable financial analysis begins with the balance sheet and is intertwined with the income statement and cash flow statement, along with the net balance of trade and foreign investment in the country. The United States has the largest economy in the world with a healthy banking, energy, and health care system, if one were evaluating these industries financial condition and profitability. Yes, there is room for improvement in many areas, especially regarding the country’s liabilities for Social Security and Medicare (entitlements), the growing deficit (over 1 trillion dollars last year), and persistent but complex issues related to trade, taxes, and direct foreign investment throughout the world.
When US financial markets retreated significantly in the last three months of 2018, investors and economists alike were a little stunned by the decline because by most fundamental measures, the economy and its major components were quite healthy, so the quick rebound and 1st Qtr GDP reading validate that assessment. With inflation readings hovering a touch below two percent, given the first quarter growth number, it is not hard to imagine many Federal Reserve members thinking that doing nothing may be the perfect solution to a problem that doesn’t exist, meaning a slowing economy or higher inflation. With first quarter earning reports starting off strong as far as meeting or beating expectations, it would seem that the rest of the year should see some acceleration in growth, especially after the difficult first quarter weather in much of the country.
As for valuations, 17-18 times forward earnings on the S&P 500, with consumer confidence and spending solid with the same situation among businesses, equities probably trade at the upper end of moderate to expensive. For investors, the question is of where there is value, and if the specific situation fits what you are trying to do and whether you want to pull the trigger and at what size. Nothing new there.
Global Economic & Financial Markets Outlook: World Markets Remain Red Hot With Asia the Pace Setter! (All country index data provided by WSJ.com, May 1, 2019.)
Investors across the world are enjoying fine returns as markets have rebounded strongly from the slump in a difficult 2018. Negative bond yields are a noteworthy characteristic of fixed income assets across many markets, especially those with economies which face little or no economic growth and structural issues. Central banks continue to prolong ultra easy monetary policy in an effort to kick start economic growth, with the byproduct being artificial bond prices and yields. Can the fabulous performance of global markets in 2019 be directly linked to these central banking policies? Maybe, and perhaps there is more than a grain of truth to the argument that global economies need central banking help to contend with slack demand and the rapid affect of technology on prices (deflation) inso many global industries. So let’s look at some results from specific areas, shall we?
China led the way with a return of 31.4%, followed by the Shanghai Composite at +22.8%, with Hong Kong’s Hang Seng offering a not too shabby 15.7% return as well. Taiwan (+12.5%), Singapore (+11.0%), and New Zealand (+13.6%) have performed nicely, as has India’s Sensex (8.3%). Turning toward Europe, the old country saw most returns range anywhere from 8.8% to double that, with Italy at +18.9% standing out. In the Western Hemisphere, Canada lead the way at +15.9%, with Brazil coming in at a not so bad +9.4%. Looking forward, it probably too much to expect the torrid returns across the globe to continue, but falling off the table and giving them back might be a stretch also. So, it may very well be the globe takes a nice pause to digest the gains until something noteworthy changes in the environment.
The Art of Contrarian Thinking-Can You Wait Ten Years, like Patient Peter, For Capital Gains?(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)
Arguably the best fund manager who ever lived is Peter Lynch, the white haired sleuth who built Fidelity into the power it is on the strength of his performance. If you are interested, Lynch has a series of books about investing where he talks how we went about finding his undiscovered gems. One of the most pertinent statistics, in my opinion, and one which has stuck with me, was that for his biggest winners, he had to own them a long time, think seven to ten years, before capital appreciation really kicked in. In today’s modern market of smart beta, algorithms, dark pools, and exchange traded funds (among other variables), the idea a computer, or the algorithm that runs the trade, is going to have a factor that takes into consideration the length of time a company is owned (in the portfolio), is far fetched. There in lies the issue in that capital appreciation makes up about 50-60% of a stock’s performance, with the balance being dividend income. Essentially, you better be prepared to exercise a great deal of patience waiting for your stocks to go up if they do not generate income. One way this can be rectified is by the company allocating capital to buy back its stock . The biggest winners in today’s market generally are using their cash flows to reinvest in the business for future growth. Berkshire Hathaway and Amazon.com were built on the premise the leaders there could invest in areas in such a way that would be far more productive than returning capital to shareholders. Much depends on your situation and wither you need income from your holdings or you are trying for capital appreciation. Each situation is unique, but be prepared to wait a long time if capital appreciation is the goal, which is why you constantly have to monitor operational performance. I hope this explains why you need to be like patient Peter to have success in the stock market.
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.