In September, the Dow Jones Industrial Average gained 1.92%, the S&P 500 rose 1.28%, and the NASDAQ increased .55%. Through the first three quarters of the year, the Dow is ahead by 14.05%, the S&P 500 up by 17.39%, and the NASDAQ by +19.33%. Over the last three months (period ending September 30), the Dow lost .73%, the S&P 500 shed 1.05%, and the NASDAQ fell by 2.40%. One of the most important economic statistics many investors pay attention to is the ISM manufacturing reading (Institute for Supply Management). In September, it fell to 47.8, down from 49.1 in August. Anything below 50 shows manufacturing contracting in the United States. Obviously, those sub fifty numbers are not positive, and some believe (especially President Trump) our Federal Reserve's interest rate policy versus the rest of the world is the reason. The U.S. dollar strengthened three percent against a basket of global currencies, rendering our manufacturing sector more expensive versus the rest of the globe, hence the thesis proposed by delightful Donald.
Stepping back a touch, the service sectors ISM reading, accounting for nearly eighty percent of the domestic economy, came in during August at 56.4, two-point seven percent higher than July's 53.7 reading. Manufacturing only makes up a little more than ten percent of the domestic economy, and it is the largest manufacturing place in the globe. In composite, there are many positive factors still in place to believe the U.S. economy will, in the words of JP Morgan Chase CEO Jamie Dixon, "Chugg Along." Interest rates are as low as a country can go, other than dipping below zero. Energy prices are constrained. Inflation is muted at sub-two percent levels, as they have been for many years. The U.S. technology industry, along with many other important sectors, remains a global leader. Housing is rebounding with a little built-up demand among first-time buyers helping the cause, along with the lower interest rates. With earnings season approaching in a few weeks, corporate profits remain critical. Many analysts see profits retreating during the last half of the year, although many of the outcomes are sector-specific. The trade tensions on the political front continue to hurt confidence. High profile business leaders and CEO's have expressed the idea that capital spending will hold off until more certainty regarding the eventual outcome of trade negotiations emerges. With equity markets trending flat for nearly two years, some are worried about a repeat of last year's mauling of equities in the fourth quarter. My take is we remain in a trading range with poor sentiment capping the upside and low-interest rates supporting the bottom of the range. For how long, and what changes the pattern, remain the important questions?
Global Economic & Financial Markets Outlook
All country index data provided by countryeconomy.com, September 30, 2019
As tension remains elevated in global financial markets, the majority of most equity market indexes are solidly in the green for 2019. Still, with over fifteen billion dollars of negative yielding bonds, one has to wonder if global economies are in good shape, based on stock market performance, why is there so much negative yielding debt available? Clearly, central banks are worried about non existent growth and deflationary forces. With all valuation for capital market assets based on interest rates, the negative yields either support higher values, or are causing higher values. It remains to be seen which one is true. Let's look at a few regions to get some specific examples of returns for the year.
In Europe, most mature countries like the UK (+9.40%), Frances CAC (+18.3%), and Switzerland (+18.07%), to name a few, are solidly positive. Asia is a mixed bag, with some strong performance in China (+14.24%) and Shanghai (+16.48%) offset by negative numbers, like in Japan's Nikkei (-9.83%). Strong performance in Brazil's Bovespa (+18.39%) stands out, along with solid numbers in Canada and New Zealand. Looking ahead, whether the continued support of global central banks and the idea that negative yielding fixed income assets are good for the global economy remain critical issues for global markets.
The Art of Contrarian Thinking- Lessons From IPO's of 2019- Why Poor Returns at Lyft, Uber, and WeWorks Cancellation Reflect the Norm for IPO's
With the recent failure of WeWork to become a public company and it's 90% loss of value for it's private investors, scrutiny of 2019 IPO companies deserves a little discussion. As many of my investors know, I believe it is very difficult to find value among freshly minted IPO's. Company's go public to raise capital and offer liquidity to existing shareholders like the first few key employees and venture capital backers. Most IPO's are led by investment banking syndicates, whose primary task is to obtain a good price for the company when it sells its shares to the public, and then find the buyers for those shares. As a buyer, usually the price of an IPO is 'rich', meaning elevated. There are many academic studies which show how most IPO's will trade down to a lower price as time passes. The longer you wait, usually you will get a much better entry point, so think in terms of a year or so. As prime examples, look no further than Lyft (NASDAQ:LYFT) and Uber (NYSE:UBER). Both companies are well off their IPO price only six months after they became publicly traded entities. There are no hard and fast rules when it comes to investing, and each year there are always a few IPO's which buck the trend and perform well. This year, the names Pinterest (NYSE:PINS), Zoom, and Beyond Meat (NASDAQ:BYND) are some of those appreciating stocks.
If you are interested in potentially buying a new public company, here are a few tips to help navigate the challenges. First, read the prospectus and concentrate on the management team and business. Second, evaluate the position of the company relative to it's main competitors. Third, consider how the company will grow over the next three or five years and where it may be at in terms of revenues and margins? Is the company currently profitable or on the way to profitability? Fourth, consider whether the company has a business which is durable enough to withstand a poor economy? What part of the business plan could be considered a weakness and how can it be improved or mitigated? Sixth, are there any corporate governance issues like related party transactions or voting share discrepancies which are troublesome? Finally, consider the range of valuations for the company and it's main challengers in the industry. These are some of the questions to consider when thinking about the challenging IPO landscape.