U.S. Economic & Financial Markets Outlook- The Key Questions Are Will the Economy Accelerate and How Will Bond Yields React to the End of Quantitative Easing?(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 lost .31%, the S&P 500 fell 1.585%, and the NASDAQ dropped 2.15%. For the third quarter, the Dow gained 1.27%, the S&P budged .05%, and the Nasdaq rose 1.55%. All major indexes are in the black (5-8%) as the first three quarters of the year is complete. Investors could be justified in thinking we have an unpredictable economy and stock market. In order to understand this point of view, the focus turns to growth, specifically GDP growth in the economy and profit growth in the equity market. With second quarter GDP revised upward to show a 4.6% expansion (from the previously announced 4%), it would not be unreasonable to believe the economy is not only stable, but is starting to accelerate.
Specific components which comprise large portions of business activity remain, at the very least, strong and stable, if not impressive. Consumer spending and energy production (which will overtake Saudi Arabia in oil production this month) remain the biggest reasons for optimism. With inflation tame and employment levels creeping ever higher, a confident consumer is always helpful. When you throw in low interest rates, strong merger and acquisition activity, and a full IPO pipeline, there are plenty of reasons to believe the business climate is clearly better. Last, corporate profits remain bountiful so balance sheets are flush with cash.
The economic strength has led decision makers to reign in quantitative easing programs, and at the very least, even consider thinking about raising interest rates. The reason for doing so is to head off the potential of future inflation. Throwing a monkey wrench into the plans of those who believe the economy is ready to post strong growth is the general weakness over the last few months across the entire commodity complex, especially in oil prices. All of a sudden, the stock market has turned very volatile as well (meaning it is going down more often than up). On balance, however, my own feeling is the economy should be strong during the last quarter. Whether or not the stock market cooperates with the traditional rally period is partly a function of earnings, valuation, sentiment, and specific investor circumstances. While it may appear to be crashing, the market usually turns out better than most think, especially when the general consensus is the world might actually be ending.
Investments: Global Economic & Financial Markets Outlook- Many Believe Global Growth Is Slowing With Asia Remaining A Source of Strength in the Markets! (All country index data provided by the market data section of the Wall St Journal September 30, 2014.)
Markets across the world have experienced a tough September. The selling is based on the idea that geopolitical events like the dispute in the Ukraine and the emergence of the Islamic State in the Middle East and Africa, along with overcapacity in China, is causing the general business approach to become more cautious. Some even believe a recession is well underway in Europe. Commodity prices in nearly every area, especially in energy and raw materials, have trended down now for a few months and some believe that trend will continue. For the year, the major commodity indexes generally are down around 5%.
In looking at the specific stock market indexes around the world, the one area which has performed extremely well, except for China, is Asia. India (+25.6%), Indonesia (+20.3%), the Philippines (+23.4%), and Thailand (+22.1%) all stand out with exceptionally strong results. Other noteworthy returns include Denmark (+22.2%), Canada (+10%), Israel (+9.7%), and Norway (+11.9%.
For those interested in looking at countries which, shall we say, have experienced some issues, Russia (-21.9%), Austria (-13.5%), and Portugal (-13.0%) all come to mind. Going into the final quarter, it will be interesting to see how events in the Ukraine, across Europe, and China play out, especially with respect to whether their economies can start to reverse the slowing trends of the last few months.
Y H & C Investments Sector Analysis- Large Differences Between Winning and Losing Sectors! (All country index data is provided by the market data section of the Wall St Journal, September 30, 2014. 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)
The wide chasm (almost 66%) among the largest sector gainer (aluminum +45.6%) and worst loser (coal -19.94%) illustrates why sector analysis can have a dramatic impact on overall portfolio performance. Allocating more of your assets to winning sectors versus losing areas makes a dramatic impact on total return, or lack thereof (hopefully not). In looking at the sectors which have performed the best during the year, Health Care, Real Estate, Technology, and Utilities all stand out, mostly for their defensive nature. Big winners include Alternative Energy and Transportation Equipment (+23.3%), Defense (+18.76%), Railroads (+20.59%), Biotechnology (+23.2%), Reinsurance (+14.7%), Residential REIT's (+17.47%), and Semiconductors (+25.51%)
On the losing side of the ledger, Coal (-19.94%), Non-Ferrous Metals (-14.15%), Diversified Industrials (-5.20%), Heavy Construction (-14%), Home Construction (-7.28%), and Broadline Retailers (-8.91%) all come to mind. Looking forward, my own thinking is to take a good, long, long, long, did I say long, hard look at the integrated oil patch to see where you might find value (hint hint, there is plenty to look at).
Y H & C Investments: The Art of Contrarian Thinking- Looking At Oil Using Facts To Aid the Decision!-( 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)
When encountering stormy markets like the current one, emotion is not your friend in making smart investment decisions. Outlandish predictions and prophets of doom very rarely include a litany of facts surrounded by context to make their investment case. The worst of these practitioners are the “chartistsâ€Â, whose backward looking data reminds me of the quote, 'Look at the pretty picture.' What you often see is the cherry picking of stock performance for evidence their predictions will be accurate. Thanks, but I'll pass.
Instead, a more time consuming approach means accumulating data and facts which can lead you to a wise investment decision. For example, let's take a look at oil and how we might apply the approach, in a limited way, but certainly a start nonetheless. The price of oil has dropped nearly $15 dollars a barrel (Brent) over the last few months. The premise is that world oil demand is slowing. According to the IEA, global oil demand in 2014 will be about 92.5 million barrels per day (http://bloom.bg/1d0A4IS). The largest major countries in the world which use oil are the United States (18 million barrels per day), China (10 million barrels per day) and India (3 million barrels per day). In the United States, approximately 770 out of 1000 households have cars. In China, the number is 69 out of 1000 and in India it is 15 families per 1000. With the low percentage of people who own cars in the two largest countries in the world, it is probably a good assumption that oil and gas usage will probably increase. Transportation methods account for over 95% of all oil uses in the United States (car, boat, truck, rail, ship, plane) and this will probably remain the case for the foreseeable future.
The supply side remains more in flux as the United States is producing 10-15% more oil each year due to better technology in offshore drilling, fracking technologies in on shore drilling, and three and four dimensional seismic imaging allowing for better location of oil deposits amongst geology in hard to navigate areas. Oil and gas remains an area to be invested in, and not away from, for the long term, regardless of negative monthly fluctuations, especially with lower than estimated demand. You may disagree, especially if you believe in the growth of alternative energy in transportation methods. Much of investing is based on the future and how you might benefit from owning assets in growing areas. I suspect oil remains a growth industry, both today and ten, twenty, or thirty years from now.
Disclosure: Y H &C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. 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, the CFA credential in no way implies investment returns will be superior for any charter holder.