US Economic & Financial Markets Outlook: As Stocks Dive In the 4th Qtr, Do Economists Have it Right or Is the Market Selloff Accurate? (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 December, the Dow Jones Industrial Average lost 9.68%, the S&P 500 fell 10.16%, and the NASDAQ Composite retreated 10.83%. For the 4th qtr, the indexes suffered a rough three months with the Dow down 12.47%, the S&P 500 losing 14.28%, and the Nasdaq plummeting 17.44%. With respect to the full year, the Dow dropped 5.63%, the S&P 500 gave up 6.24%, and the Nasdaq surrendered 3.88%. It has been a running joke in the capital markets that bond market investors were thought to be far more astute on understanding market risk than equity investors. Interestingly, the current situation in the US seems to have a considerable disagreement between equity investors, in the form of major market indexes, and most economists.
You see, equity investors are saying, based on the recent selloff, that the economy is going to slow down dramatically in 2019, and perhaps enter into recession late in the year or early in the following one. Most of the major investment banks head economists don’t agree as they have the opinion that the economy is on sound footing and should continue to post 2-2.5% GDP growth next year, at the very least. If one includes in their opinion the data from corporate earning reports, each industry has their own unique, specific situation, but when you look at the S&P 500 full year figures, the current estimate is at the $170.00 per share mark, which leaves the market multiple at a touch under fifteen times forward earnings (slightly below the historical average of 16-17x). Naturally, interest rate sensitive groups like financials, autos, and housing are affected more by interest rate movement (they have been raised versus last years levels).
Many critics of the Federal Reserve believe the pace of interest rate hikes is too quick, especially if one factors into the equation weakness in cyclical company profits (CAT, Fed Ex (NYSE:FDX) for example). With oil prices selling off and interest rates still very low on a historical basis, the consumer spending portion of the US economy looks good. If you research recent credit card delinquency rates and major bank balance sheets, the former have risen a touch but aren’t dramatically above typical levels and the latter are well reserved with probably too much capital. So, on the surface and with those two variables in mind, I tend to believe the major economists are right about the question of whether the market slowing is just a slight blip. As we all well understand, markets have a dramatically different opinion, and naturally, that is what makes markets!
Global Economic & Financial Markets Outlook- 2018 Concludes With A Sea of Red As Equities Suffer The Worst Year Since 2008! (Country index data provided by the Wall Street Journal, December 30, 2018.)
If ever there was a year which displayed the interconnected nature of global markets, 2018 was it. The abundance of red which flowed in investors equity portfolios spared virtually no hemisphere, continent, region, or country. With the advent of digitization and entities which control and manage capital across multiple jurisdictions, the use of leverage can cause problems in one place to migrate across multiple areas. With Asia, Europe, and North American suffering heavy losses, it became evident as the year closed that the global slump had to eventually infect the strongest equity market, the good old US of A. Let’s take a look at the grim results, shall we? In Asia, Mainland China fell 24.22%. Shanghai lost the same amount, while Hong Kong only fell 14.8%. Japan’s Nikkei was down 12.1%, and the Philippines (-12.8%), Singapore (-10.9%), and S. Korea’s Kospi (-17.3%) dropped as well, along with Taiwan (-8.6%) and Thailand (-10.8%) In Europe, major countries England (-12.4%), France (-11.9%), Germany (-18.3%), and Italy (-16.1%) all took it on the chin quite hard. Eastern European regions like Turkey (-21.6%), Poland (-9.5%) and Hungary (-.6%) were not much better. You can see, pretty difficult, eh?
In North America, Canada’s TSX (-12.3%), Mexico (-16.0%), and Chile (-10.6%) were also a struggle. Across the globe, Brazil (+15.0), India (+5.9%), and New Zealand had solid gains. We should also mention that noted investor’s paradise, Jamaica (up over 200% in the last 5 years), as it has benefited from an infusion of Chinese capital to outperform. Could the Chinese want something in return, man (imagine that)?
Looking ahead, the key issue across the globe is whether the path of QT, quantitative tightening, continues to disrupt investors and markets or whether capital gets accustomed to a different aspect of the various central banks method of managing global economies?
The Art of Contrarian Thinking- Knowing the Shareholder Base of A Company Is Important When Investing In Individual Companies! (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 a difficult time in the equity markets, like the last quarter, many companies suffer from a declining stock price. As an investor, one of the ways to piece together what is happening with that equity is to know what entities make up the shareholder base. The most important shareholders are those which own the greatest percentage of stock, and preferably, voting stock. A good place to start is with the ownership stake of the board of directors and the management team. As a shareholder with a minority stake, if the management team owns greater than 15%, and higher is always better (think 25-40%), they have far more economic exposure to the stock than you do. They also have far more potential financial upside if the business grows and prospers. If an entity has a large percentage of ownership, say 5% or more (this requires disclosure with the SEC), it means the stock price can change dramatically if the entity decides to change their ownership stake. Obviously, if a group sours on the company prospects and decides to reduce their stake, there is a high probability of selling pressure. If for example, a lot of stock is owned by another public company because the two are partners in some way, if that relationship changes, it can affect the stock price.
A company’s shareholder base can be found from major information providers like Bloomberg, Yahoo (NASDAQ:AABA) Finance, or Google (NASDAQ:GOOGL). Once you research the list of major holders, you can investigate how long they have owned the positions and how it many have changed over time. Many of the major holders come from large fund companies like Vanguard, State Street (NYSE:STT), Fidelity, or Blackrock (NYSE:BLK), so it is important to monitor their holdings if they own the company your exposed to. I hope this helped explain why a company’s shareholder base is important.
Disclosure : 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.