In June, the Dow Jones Industrial Average gained .80%, the NASDAQ fell 1.62%, and the S&P 500 increased .18%. At the halfway mark of the year, the Dow is ahead by 2.90%, the NASDAQ dropped 3.30%, while the S&P 500 rose 2.70%.
Whenever one looks at the performance of the domestic economy, a solid place to start is with consumer spending because it accounts for about two thirds of all U.S. economic activity. Over the course of first half of the year, there have been serious concerns raised about whether consumer spending would hold up well in 2016.
During the first quarter of 2016, it rose 1.5%, hardly a great performance but certainly not falling off a cliff. In the most recent months of April and May, the urge to splurge increased 1.1% and then .4% when not accounting for inflation.
Based on these numbers, second quarter GDP growth is projected at 2.6%, according to the Atlanta Federal Reserve. All things considered, the consumer has held up pretty well and with energy prices slowly inching up, personal debt levels retreating, and anything commodity related still at the lower end of the pricing band, a similar performance in the back half of the year seems a pretty sure thing.
Even with a sturdy spending pattern, markets have been on edge all year long. If you can remember back to the wild days of January, the first two weeks of the year saw a fifteen percent decline, maybe one of the more surprising starts in more recent memory. Having recovered a month later, essentially investors have been treading water and handling the various emotional swings the market has for whatever is the flavor that month. If it is not corporate earnings, it is global instability from currencies, politics, or potentially terrorism.
Some think the uncertainty from the upcoming presidential election is also a factor in the wild fluctuations. Economically, current conditions are pretty much the same they have been for quite some time. Interest rates and inflation are on the floor with the ten year treasury at below 1.5%.
Oil has seen a nice bump since the start of the year, but still is well below what is considered a ‘normal price of $60-70 a barrel. Corporate profits have been falling the last six quarters, so when earnings season begins in earnest in a few weeks, all eyes will be on the results to see if there is an improvement.
In the corporate arena, merger and acquisition activity has not been as strong as in 2015, and the IPO market remains essentially dormant. Brexit was an unforeseen event which now adds an additional variable to the lingering question of global growth prospects.
Investor sentiment remains skeptical, at best, at the prospects for equities because of high valuations, weak corporate earnings, and questions about many important segments like banks, energy, and retail.
All in all, with so much pessimism permeating through markets, and bond yields literally a non starter as a comparable asset, now is a very interesting time for anyone looking to assume risk.
Global Economic and Financial Markets Outlook- Brexit and Negative Interest Rates Lead World Markets Down
(All country index data provided by the market data section of the Wall St Journal, June 30, 2016.)
When the U.K voted against a referendum to remain in the European Union, global markets were stunned, shocked, and any other adjective you could use to describe the upending of a long standing relationship between Europe and the Brits. Many other markets all over the globe have struggled with the ramifications of slowing growth and too much capacity in a world dependent on exports of commodities.
The policy response of central bankers remain rock bottom interest rates and intervention in the fixed income markets. Up to this point, investors are still unimpressed, and becoming more skeptical by the day.
You can see this in the poor performances of equity indexes like China (-17.0%), Japan (-19.7%, and across Europe (-12.3%). Some of the more forgettable results include the drubbings in Italy (-24.4%), Portugal (-16.2%), and Spain (-14.5%).
As for places which have bucked the trend, in general the solid showings in the western hemisphere have been impressive. Brazil is the most noteworthy, ahead by 18.9%, followed by Canada (+8.1%), Mexico (+7.0%), and Chile (+5.8%).
It remains to be seen whether the rest of the year will follow a similar outcome, but with the vast questions regarding what Brexit will ultimately mean in Europe, it is probably practical thinking to expect capital to search for stability in the larger markets of North and South America.
Sector Analysis: Investors Continue to Play Defense With Telecom, Real Estate, and Utilities
Whenever you attend a sporting event and the crowd chants DE-fense, it is urging the good guys (home team) to show some spine in preventing the opposing team from scoring. In analyzing the various segments of the domestic equity market, the defensive nature of positioning is apparent in the most favored areas, namely utilities and telecommunications.
These two industries continue to attract capital with both groups up over 21% for the year. Real estate is also a place where investors are flocking, with most of the different components showing strong results, except for services (-27.79%). In general, real estate is up by a little over 10%.
The most outstanding results have been in mining, again consistent with the defensive posture. Long suffering coal is ahead by 103%, gold mining 113%, and platinum and precious metals jumping 36.39%.
Oil and gas have also been solid with a 13% jump for the year. Areas taking it on the chin also include alternative energy (-36%), airlines (-23.93%), consumer electronics (-26.58%), biotechnology (-16.96%), and long a bow wow, the joy of financials (-11.56%).
The Art of Contrarian Thinking: Buying In A Down Market Is Hard, and It Requires Work and Will
Warren Buffett’s famous partner Charlie Munger believes investing should be hard. To paraphrase, why should it be easy to be right one time in your life about an investment and become financially secure?
You not only have to be right about your analysis of the business prospects, you have to be willing to put up your hard earned capital to own something where there is no guarantee the asset will become more valuable.
Given this uncertainty, many investors have rules about not buying when the market is falling, or limiting the size of a position in order to maintain good risk management practices. Risk is always an important consideration of investing, and no good professional is unaware of the risks of buying an asset before they purchase it.
Still, if you do some research on some of the most successful investors in history, a common theme is they buy what they like and if the price drops, they buy much more on the way down. Is this easy? No. Can it lead to large losses? Yes. Would most investors be comfortable implementing this approach? No. What does it take to use this strategy? A great deal of analysis, and most important, will (or as Peter Lynch famously said, a strong stomach).
Please understand, I have my own perspective and approach and I also have the battle scars from using such a strategy. As some of my investors can attest, there have been situations which have been down enormously and sometimes they do not rebound, or have a fantastic return. Not everything you invest in is going to work.
However, finding mispriced assets requires the ability to put in the analytical work and have the courage to pull the trigger if you believe there is a chance at out performance.
If you have any questions or thoughts regarding investing or this edition, please email me at information@y-hc.com
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