In what was a very volatile month, as is usually the case for October, the Dow Jones Industrial Average gained 2%, the S&P 500 rose 2.36%, and the NASDAQ increased 3.21%. At long last, after plenty of debate, conjecture, argument, and of course, data, quantitative easing is officially over. The Federal Reserve put the kabosh on the buying of fixed income securities and will continue to monitor its various sources of economic information regarding how it proceeds with monetary policy decisions.
October is a notoriously volatile month for financial markets and this year proved no different. Deflationary worries and slowing global growth weighed on the equity markets for the first fortnight of the Halloween laden thirty days. In addition to those concerns, lower prices across the commodity complex, along with the global ebola scare, have investors attentive and worried, at least they did for a while. The most notable and important story in the globe is the quick and sharp drop of the price of oil. 'Black gold' prices have dropped over 25% since June, although it remains to be seen how permanent these levels will be. In combination with the drop in commodity prices, the dollar has surged against most major currencies. Gross domestic product growth for the third quarter registered at 3.5%, a far better reading than what is taking place in most other major developed areas like the Eurozone.
As we are in the middle of the corporate reporting period, profits from all across the economic landscape have generally remained robust. As the Federal Reserve has clearly indicated, though quantitative easing has ended, the path going forward still remains slanted towards maintaining low interest rates. With inflation tame at 1.5%, and unemployment gradually ticking downward, capital expenditures have picked up and will probably stay strong for a while. Lower oil prices will certainly help consumers (and retailers), so that should provide at least a temporary boost to spending. With the all important holiday months approaching, don't be surprised to see a fourth quarter GDP print of above 4%. As for the stock market, November and December are traditionally very strong months of performance. Could we see the typical Santa Clause rally? Plenty of unpredictable geopolitical events could throw cold water on that notion, but it certainly is not out of the cards.
Investments: Global Economic & Financial Markets Outlook- It's All About Asia! (All country index data provided by the market data section of the Wall St Journal October 30, 2014.)
If you are an investor and want to implement the popular motto from the song, 'Be Happy', you would just continue to own the indexes of the largest countries in Asia. Take a look at the year to date returns of these indexes: India (+28%), China (+12%), Indonesia (+18.7%), Phillipines (+20.4%), Thailand (+20.3%), and last but not least Sri Lanka (22.9%).
On the opposite side of the spectrum, if you alter the lyrics to 'Be Miserable', just look no further than Russia and Portugal, down 26.6% and 20.8% respectively. Austria also laid on some misery for investors as it has lost 14.8% for the year.
The biggest issue for investors to focus on regarding international markets is the drop in commodity prices and its affect on the current account of specific countries. Brazil and Russia recently raised interest rates in an effort to protect their currencies from continuing to lose value, especially against the dollar. Countries whose budgets are predominantly dependent on commodity prices, particularly oil, for a large percentage of their revenues (pretty much all the Middle East, Russia, and Venezuela, and Brazil), are particularly vulnerable to currency weakness if the oil price slump continues for any lasting duration.
Y H & C Investments Sector Analysis- Tracing Sector Returns to the Underlying Cause! (All country index data is provided by the market data section of the Wall St. Journal, October 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)
With the now popular belief that an investor can identify potential opportunities based on charts, call it the 'Look at the Pretty Picture' investment style, the conventional approach to analyzing and understanding why an investment grows (or not) is not being given enough attention by the general investing public. It is important to grasp why an asset or its class goes up, as opposed to the reasoning it formed something like a 'Double Bottom' -- not to be confused with a person's hind quarters.
As an example, and a very simple one at that, lets look at the three top performing industries in 2014 -- railroads, trucking, and airlines. A common characteristic is they all are transportation related. An obvious distinction among them is they all rely on oil and gas as their dominant input cost. Airlines and railroads have also consolidated as industries, so there are far fewer competitors. Yes, their business models are a bit better, but the key point is because oil and gas prices have declined 25% over the year, investors have responded accordingly by believing the input will help improve profitability.
Using another example, as the world experiences increasingly hostile terrorist threats or nation states, the defense industry becomes significantly more important to each country. As such, defense contractors will see improved global demand for their services. The same could be said for internet security firms. These are simple examples, but when you think about investing, understanding the fundamental dynamics of each situation is crucial, not drawing happy faces.
With respect to individual sector performance, notable returns come from areas like oil pipelines (+17.18%), water utilities (18.57%), reinsurance (+16.27%), and residential Real Estate Investment Trusts (+27.34%) In the taking pain category, mortgage finance (19.15%), non-ferrous metals (-23.18%), and obviously coal (-25.26%) have been drawing blood all year long.
Y H & C Investments: The Art of Contrarian Thinking -- Investing When Others Don't Want to Is Difficult But It Has to Be Part Of Your Game Plan! -- ( 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)
During the last few weeks of October, any observer or market participant has seen why markets can best described as 'Fear vs Greed.' The investment world is full of the cottage industry types who make their reputations based on permanent calls for a market crash (you may have family members or friends who believe the same thing). None of these experts will ever admit they could be wrong about how they approach investing. Instead, they will tell you to own cash, treasury bonds, or Gold and be very happy to take your 1-2% and not lose any principal. Thanks, appreciate the advice, but there are many ways to skin a cat. For most investors, if your starting level of assets is not noteworthy, making 2% per year on your money is probably not going help you retire or meet your other financial goals.
As a result, many look to the stock market as an alternative to the 'world is ending' approach. Historically, equity market returns average about 8% per year, with the caveat we all know, 'PAST RESULTS ARE NOT A GUARANTEE OF FUTURE RETURNS!' The eight percent figure encompasses about a century of data. During any decade, however, there is a great deal of variation in the outcome. Periods when investors experience corrections where an asset can decline 10-20% (or more) are not unusual. For this reason, investors have to be able to get comfortable with the notion that price declines are just the nature of the beast. In fact, in order to possibly outperform the market, buying the dips is a strategy which not only has to be considered, but embraced (as Mr. Buffett often says, 'Be Greedy When Others Are Fearful). Knowing what you are buying, the price you are paying, and why you are buying it are the vital part of adopting this long term mindset.
Investors are confronting a period when cynacism and skepticism reign supreme. With the events of the last ten years, there are plenty of reasons to be cautious. However, in approaching the contemporary equity markets, using market declines to your advantage historically has been a very productive and worthwhile approach.
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.