U.S. Economic & Financial Markets Outlook
Recent Consumer Spending Strength Forebodes An Improving Economy! (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 June, the Dow Jones Industrial Average lost 1.71%, the NASDAQ Composite fell 1.51%, and the S&P 500 declined 1.87%. With the U.S. economy sputtering along during the first quarter, May's consumer spending increase of .9%, the largest since 2009, can be viewed as confirming the expectations of an improving domestic economy. Energy prices remain at low levels, employment and household income trends continuing to drift upwards, and the summer season is well underway. It is not unreasonable to ponder the promising possibility the penchant for spending might just be a tad better than most analysts predict. If so, conditions for better than 3% GDP growth during the back half of the year might deliver the goods.
The environment for better growth remains in place. Interest rate policy has been, and continues to be, accommodative (to say the least). Inflation is tame, and official unemployment improved. Merger and acquisition activity continues it's torrid pace and 2015 might turn out to be the most active year for transactions ever. Corporate profits remain elevated, as do aggregate stock buy back programs. With commodity prices suppressed because of overcapacity issues in emerging markets, input prices are helpful for companies seeking earnings consistency. As reporting season rapidly approaches, the thesis of satisfactory results for the service sector is probably accurate.
As for equity markets, the lingering criticism of stretched multiples and unsustainable profit margins will be put to the test shortly. Summer is usually a period of muted volumes, but with the Fed and geopolitical events on the front page, investors should expect a bumpy trip for those willing to take the ride.
Y H & C Investments: Global Economic & Financial Markets Outlook- Europe, China, and Japan All Perform Well As Greece Remains the Fly In the Ointment! (All country index data provided by the market data section of the Wall St Journal, June 29, 2015.)
In looking at equity market performance midway through the year, capital flows continue to be attracted by central banking policy. With China lowering rates and capital requirements, Abenomics in full force, and Mario Draghi implementing quantitative easing in the old continent, investors have rewarded those locales with stellar returns.
Countries which have struggled in 2015 include Canada (-1.0%), Turkey (-4.6%), Switzerland (-1.3%), and Indonesia (-6.6%). Still, the looming issue of Greece and whether the country will ultimately leave the European Union remains a prime consideration for investors. As of this publication, Greece has defaulted and is headed toward a referendum. Events are fluid, and it appears a referendum will take place on Sunday, July 5. The result will play a part in what transpires next all over the globe, especially from the standpoint of investment psychology. The consequences of how the matter eventually gets settled will determine how capital is allocated going forward.
Y H & C Investments Sector Analysis- Halfway Home and Sector Losers Outnumber Winners!(All country index data is provided by the market data section of the Wall St Journal, June 29, 2015. 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)
2015 has been a struggle for investors in many sectors of U.S markets. In looking at major groups, losers outnumber winners 8-3. Individual sector decliners number 80 versus 65 positive areas. Groups having strong performance include Toys (+20%), Health Care (+9.41%), drug retailers (+9.74%), and specialty retail (+12%). Oil and the financial group remain flat or worse, although specialty finance has been strong (+12.0%).
Looking ahead to the last six months, a strong consumer should be a boost to many parts of the market. The accepted wisdom of a September rate hike by Yellen and the crew should help bolster financials. Certainly, anything industrial has been a world of hurt during the last quarter. With the recent months bringing far more volatility, expecting dramatic changes in sector performance seems like the correct approach.
Y H & C Investments: The Art of Contrarian Thinking: Looking For Leadership- Honesty, Authenticity, Background, and Judgment Are Mandatory Qualities! (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)
Every investor is looking for a CEO who will lead the company to exceptional results in financial performance and shareholder returns. Easy to talk about, much more difficult to achieve. Further adding to the task is finding a leader who others are not paying attention to, or do not know about. Known quantities cost far more, as you would suspect. Investing with Buffett, Malone, Jobs (now Cook) is not hard to do after they have torn the market up for decades. You want the guy who is the next Cook. So, how do we find those people and the companies they lead?
Clearly, you have to look very hard at many entities in the market for businesses and industries you want to be in. Difficult, yes, but with over 6,000 stocks on U.S. exchanges alone, not an impossible task. Once you identify the company (s), you want to look at the CEO and their previous work experience, background, and education. What other companies have they led? What were their results? How did the situation end? I strongly suggest listening to the most recent conference call. How was it conducted? Did you like the tone and tenor of what was said? How was the outlook for the next six months? What is the long term strategy and was it a major theme throughout the presentation? Make sure you go through recent investor presentations and try to listen to them as well. If you can, read through the annual report. You should see the same ideas being communicated on investor calls, presentations, SEC quarterly filings, and annual reports.
Personally, I want CEO's to identify areas which are challenging first. In doing so, I want explanations on how these areas are being addressed and in what time frame. You are buying a CEO's judgment in how to invest capital and lead an organization with a clear vision. Their past experiences will tell you their approach. Use the information wisely as it can make a huge difference in potentially finding the next great leader.
Thank you for reading the newsletter this month. If you have any questions or thoughts regarding investing or this edition, please email me at information@y-hc.com
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.