In August, the Dow Jones Industrial Average lost 6.60%, the S&P 500 fell 6.29%, and the NASDAQ dropped 6.86%. As fall rapidly approaches, the data dependent Federal Open Market Committee has much to consider before it's next meeting. With 2nd quarter GDP coming in at a revised 3.7%, the latest durable goods orders strong, and inflation muted at 1.2% annualized, the last piece of the recipe for a modest interest rate hike is a strong August jobs report, due this Friday. Of course, recent global market volatility is going to be considered as well. A skeptic would say the recent roller coaster activity has to be considered, especially after gyrating markets more closely resemble a ping pong match versus an orderly financial environment.
In looking at the current setting, it now seems deflation is back on the table for being the most immediate concern. Commodity prices across the complex remain on their back with oil, steel, copper, gold, rubber, corn, soybeans, and silver are all at multi year lows. Employment levels keep ticking up, and consumer spending and confidence remain strong. The borrowing climate is accomodative, and has been an impetus for creating the continuing boom in corporate deal making. The investment banks have never been busier with transactions of all kinds. Corporate profits remain elevated with continuing strength in consumer oriented areas, especially restaurants, autos, and specific areas of technology, like security software.
Looking into the future, investors remain focused on the Federal Open Market Committee's policy posture. I suspect one-and-done is what we see for the rest of 2015, but the timing of lift off remains a question. Still, lower for longer remains, the dominant theme for as far as the eye can see, however. As for equity markets, the fall is typically a time of higher volumes and activity across many capital asset classes. Market lore tells us it has a pattern of being very volatile, and especially tough if you are long risk. My experience has been the end result is usually better than most participants expect. If not, there will all kinds of opportunities to take advantage of, depending on the courage, nerve, and capital availability of the investor.
When China sneezes, the rest of Asia gets sick! Such is an accurate description of what is transpiring with respect to the investment results of equity indexes across the globe. As China tries to transition from a manufacturing and building economy to one which is more consumer oriented, the hangover of expansion overcapacity remains. Investors have routed indexes all across Asia, sans Japan. Take a look at these figures: China's Shanghai (-15.1%), Indonesia's Jakarta (-14.9%), Hong Kong's Hang Seng (-8.4%), India's Sensex (-4.0%), Singapore (Straits) (-12.2%), Taiwan (-13.8%), and Thailand (-8.8%). Not a pretty picture, although Japan's Nikkei has bucked the trend (+9.7%).
In Europe, results have been far better, actually, in most cases, very solid. The range of performance for most country indexes across the continent is from +12 to +28%, with most coming in at around +6%. Outperformance includes countries like Denmark (+24.9%), Hungary (+28.3%), Italy (+15.7%), Portugal (+10.0%), and France (+9.4%). Turkey was the worst performer in the region, down 12.9%. It would not be unreasonable to think Europe's form of QE is having the desired affect of attracting capital flows. It seems macro investing continues to set the tone across the globe.
There is a famous saying about analysts: In a bull market, you don't need 'em, in a bear market, you don't want 'em. Without question, for the majority of industries in U.S. equity markets, stocks are in sell-off mode. In fact, 107 out of 145 sectors have negative performance in 2015 and that does not include a 3% sell off on the first day of September. There are certain segments which have clearly suffered far worse than the general market. What might they be? Most obviously, oil and gas have been horrific (-18.4%). Basic materials are also a problem area, losing 14.26%. Equipment joined in the misery, losing 9.57%. Other areas feeling the sellers wrath include real estate (-6.51%), and semiconductors (-13.44%). Great, just great. Are there any winners? Not many. Not many at all.
First, you have to look at health care. It has held up well, at least at this point. Overall, the category is up 5.99%, with health care providers up a whopping 14.38% for the year. Consumer services have held up as well, led by broadline retail, gaining 13.88% and specialty retailers, ahead by 15.42%. You can see, the available selection is pretty slim, reflecting how tough it has been if you are long equities.
Having been through a few difficult markets, I thought I would share some thoughts on how to try and navigate the current treachery that is the equity market. First, you should review your portfolio to make sure you are comfortable with the amount of exposure you have to stocks. The basic rule is if you need the money in five years or less, it should not be in equities. Next, examine each holding and it's business. You should be able to explain very clearly why you own it. Make sure this includes the primary reason for owning it, typically growth, income, or both. Next, you should be able to list it's main competitive advantages relative to their strongest adversaries. Maybe most importantly, you should think about why the company has the financial strength to outlast a tough trading time frame. If the economy were to be tough for two years or more, could it hang in there? Make sure there is plenty of cash on the balance sheet and the cash flow easily covers interest requirements.
If you are looking to potentially profit from the recent market carnage, identify stocks you want to own at what you think are good prices. You might acquire assets you can profitably own for generations. Another possibility would be to short overvalued companies, or even to buy volatility. Those strategies might seem simple, but in many cases are far more difficult than they sound.
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.