In April, the Dow Jones Industrial Average dropped .11%, the S&P 500 lost .36%, and the NASDAQ fell 2.83%. In the first quarter of 2016, GDP growth came in at an annualized rate of .5%. It is the slowest quarter of growth in the last two years. Historically, the first quarter can be a soft one. Still, there are certain segments of the economy which are in solid shape, like housing, autos, banking, commercial real estate, and health care. Retail remains a trouble spot because of competition and overbuilding. Energy is a sector which is trying to work off the oversupply built up from years of record products and technological advancements. Technology based areas struggled mightily during the first quarter, so it will be interesting to see if the lower rate of growth will persist during the rest of the year. What could cause a pickup?
First, all of the current conditions which have been in place for the last few years remain staid. Interest rates are at rock bottom levels (10-Year Treasury at 1.82%), and commodity prices too, although some have seen some lift in the last few months (copper, oil, steel, gold, silver and grains). Merger and acquisition activity remains very high in the corporate area, but the IPO window has slammed shut. High yield credit markets have also tightened up as lower rated credits find far fewer owners willing to take their issues. Corporate profits have dipped for the last three quarters, and a few high profile public companies (Apple (NASDAQ:AAPL), Google (NASDAQ:GOOGL), etc) missed earnings estimates, further putting into question the overall health of the earnings power of domestic publicly traded companies.
When viewed through the prism of stock prices, lower profit outlooks will always put into question how much a buyer is paying for slower growth. Looking forward, as it becomes more evident who the two presidential nominees are, the country braces for a contentious contest between two candidates many find unappealing. With summer rapidly approaching, hopefully the hot weather will stimulate economic activity for a nation which badly could use improved economic growth.
Global Economic and Financial Markets Outlook- Europe, China, and Japan Struggle While the Americas Firm Up! (All country index data provided by the market data section of the Wall St Journal, April 30, 2016).
As the investment community grapples with negative and zero interest rate policies of central banks in Europe and Asia, equity owners are quickly noticing their impact. Indexes in China and Japan have lost anywhere from 12-16% of their value over the past four months. In Europe, major index ETFs are retreating as well, slipping from two to eight percent in most cases. Interestingly enough, Russia has performed extremely well, attributable mostly to the strength in oil prices during the last quarter. Peering west, the continents in our hemisphere saw solid numbers in Canada (+6.7%), and all across South America, with Mexico (+5.9%), Chile (+8.2%), Argentina (+17.7%), and Brazil (+25.3%) leading the way. The weakness of the U.S. dollar clearly helped the equity owners of neighboring lands. If dollar softness continues, it is possible the trend will continue as these markets get stronger. The political environment in these countries is also a large factor, with leadership changes in Brazil quite probable, and the potential for another major one in Venezuela also rising. Investors would be well served to continue what is monitoring what is transpiring down south.
Y H & C Investments: Sector Analysis: Investors Play Defense as Telecom and Utilities Lead the Way! (All country index data is provided by the market data section of the Wall St Journal, April 30, 2016. 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 domestic markets see slower growth, the psychology of many participants moves away from riskier segments toward more stable industries. The preceding thesis is confirmed by looking at which areas have the highest returns over the last four months. Ta da, it happens to be utilities (up 11.60-16.05%) and telecommunications (+10.84%), and some risk taking in industrials (+10.32%). More adventuresome investors also were rewarded in oil and gas shares as the area gained 12% in 2016 (so far). There are some major industry groups hugging the flat line as well, including consumer goods (+3.22%), health care (-2.21%), consumer services (-.34%), and financials (-1.21%). As the year progresses, if slower growth persists, one can imagine these trends remaining in place.
Y H & C Investments: The Art of Contrarian Thinking: Incorporating Investment Flexibility Into Your Long Term Strategy! (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).
There are many investors who use a few specific strategies to earn excellent returns for both short and long-term time periods. Each person or management team has to make their own choices about what approach they want to use when investing capital. As one investigates the philosophies of many investors who have achieved outstanding track records for a number of years, there are some notable consistencies. Strong management teams are one, looking for unique business models is another. Placing a priority on the future, and paying a reasonable price for sustainable and predictable assets are also part of the equation. These are a few principles one usually finds to potentially use in your approach. I am sure there are others you can include as well.
In addition, I think to supplement your foundation, it is important to be strategically and tactically flexible in trying to find outstanding possibilities for long term investment returns. Looking at arbitrage possibilities, currency and tax dislocations, or dramatic change in an industry or specific company all need to be investigated and included in your investing toolbox. One or two of these areas can lead to a chance at a superior investment. Widening the scope of how you think about investing can be have a dramatic impact on your investment results and I urge you to consider these and other possibilities!
Disclaimer: 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.