US Economic And Financial Markets Outlook: 2nd Quarter GDP Hits 4.1% As Consumers Lead the Way- Is It Sustainable?
(YH&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 July, the Dow Jones Industrial Average gained 4.84 %, the S&P 500 rose 3.69 %, and the NASDAQ increased 2.63%. When second quarter GDP came in at 4.1% (versus the 4.2% expected figure), economists rightfully noted the number as being quite good, with the obvious caveat of long term sustainability. Historically, over the last decade, such a strong quarter typically is followed by quarterly results which trend toward the 2% rate. Of course, there are different political administration’s involved, and their regulatory approaches vary as well. Noteworthy in the report was the strength of consumer confidence, spending, and capital investment by businesses. Interestingly, inventories were flat, suggesting potential for additional growth in the future if those were to normalize.
From a long term perspective, with favorable financing conditions (10 year yield at 3%) and annual inflation still docile at sub 2.5%, there are some who argue (mainly Jamie Dimon, CEO of JP Morgan Chase) that given the shallowness of the recovery and despite its length, it is possible the domestic economy has another few years left to run. Others believe the late stage of the economic cycle is where smart investors should preparing for the eventual tapering and downturn. Recent monthly reports in the real estate area might back up such caution as new housing sales have slumped.
As part of the analysis, if we turn to corporate earnings, with a few outliers, generally they met expectations. With massive buybacks announced and plenty of available cash ready if management teams find their own stub attractive, it seems credible that the market may have a floor underneath it just on that circumstance. The banking system looks quite healthy, based on the recently completed CCAR reviews from the Fed. With merger and acquisition activity robust, if not hot, or at the very least, quite warm, investment banks should benefit along with a nice trading environment that is chalk full of volatility in fixed income, currencies, and commodities. Venture capital firms continue looking for exits with favorable multiples, and the private equity groups remain plenty flush. We should also mention the one unknown Mr. Dimon discusses, that being the unwinding of quantitative easing, and in combination with tariff tensions, both offer potential headwinds. Given the personal volatility of the leader of the current administration, Mr. Trump himself, investors would probably be wise to take his comments with a lot of skepticism (what other way could you?), and continue to focus on the many positives of the current domestic economy.
Global Economic And Financial Markets Outlook: Global Economic and Financial Markets Outlook-As QE Tapers Down Across the Globe, Tariff Disputes Escalate, and Currency Volatility Increases! (Country index data provided by the Wall Street Journal, July 30, 2018.)
As global central banks begin the process of reversing the unprecedented monetary stimulus applied over the last decade, it is understandable if there were outcomes which might not be entirely anticipated by most investors. In looking at the international equity markets, some regions are having vastly different results than others. For example, the Sensex in India is ahead by 10% while the Mainland China Dow Jones Composite has lost 12.8% so far, as has the Shanghai Composite (-13.2%). Elsewhere in Asia, Japan’s Nikkei lost 2.7%, Indonesia’s Jakarta is down 5.2%, and so is the South Korea KOSPI (-7.1%). Interestingly, the Thailand SET (-3.0%), the ASX of Australia (+3.5%), and the PSEi of the Philippines (-9.2%) have a wide range of results as well.
With the divergent results specific to each country, the sovereigns currency relationship relative to the dollar is probably a factor in these results as well.
Turning to Europe and North America, the poor performance in Eastern Europe, especially Hungary, Turkey, and Poland, also has to be seen as at least partially attributable to dollar strength. The major Western European countries have been stable relative to their Eastern brothers, ranging anywhere from minus 1 to plus five percent. In North America, Mexico, Brazil, and Canada have turned positive as maybe there is a honeymoon period to new Mexico President Elect AMLO. Of interest, though unrelated, is the fact that the Iranian currency dropped dramatically over the last week. It might be something to pay attention to as it could have dramatic implications both economically and politically.
The Art of Contrarian Thinking- Feeling Stupid Is Part of Investing, So Embrace the Awkwardness of Not Being Comfortable!
(YH&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)
We’ve all been there- you spill something or trip in front of a bunch of people. Maybe you come up with the wrong answer to an easy question in class, or just feel foolish about a decision you made that did not turn out the way you thought it would. Guess what? You are probably on the right track to successfully participate in the difficult world of investing. Let’s face it, there are a lot of companies with more capital at their disposal (call it multiple billions). All of those firms employ quite a few extremely intelligent and highly credentialed employees who specialize in areas of the market where they are employed based on their ability to make the firm lots of money. The firms also have access to the best technology for artificial intelligence, machine learning, cloud computing, the internet of things, algorithms, etc. In looking at these obstacles, they are all quite formidable and can make an investor wonder why even bother, just own the indexes!
The reason why you bother with being uncomfortable when you own some company nobody pays attention to is because in the end, if your analysis is correct, you will benefit financially. You don’t need to be a genius about everything macro, micro, currency, or market related, or try to compete with entities that have billions. You just have to be right about that one weird little company that seems quite interesting. Get used to the uncomfortable feeling in the pit of your stomach because ultimately, you might benefit from it more than you ever imagined (if your analysis is right and you have a strong stomach).
Thanks for reading the monthly newsletter and good luck with your investments!
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.