(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 November, the Dow Jones Industrial Average gained 1.06 %, the S&P 500 rose 1.36%, and the NASDAQ dropped .36%. It is pretty much accepted practice that markets are generally forward looking, so much so that prices reflect an outlook six to nine months into the future. October and November were perfect examples of this idea with investors deciding domestic growth is slowing so multiples of earnings on stocks deserve to shrink. The key issue is whether slowing growth actually comes to pass? Tariff issues with the rest of the globe and reduced capital and investment spending in the corporate sector are key items that analysts point to as potential reasons for concern. Federal Reserve policy of sustained interest rate increases to normalize the price of money has dramatically affected transaction volumes in the all important housing and auto sectors, especially housing (refinance activity is down dramatically- over 20%). The all important holiday shopping season started out quite strong in the digital area with significant increases in the online space, so much so that merchant figures show total sales up nearly 30% there, along with dramatic increases in traffic. For brick and mortar retailers, the numbers were not nearly as impressive with traffic and volumes down 4-5%. Most analysts see consumer spending holding up quite nicely for the holidays as a whole, with many estimates showing a 3-4% year over year improvement.
With the dollar strengthening, oil and energy prices have seen a staggering drop of 30% in nearly six weeks, which should also provide a tailwind for consumers. With only a month left in the year, many investors will use the next few weeks to lock in gains and take losses in order to optimize their tax liabilities for April. Just as important, the last few weeks of December usually provide a nice opportunity to find beaten down stocks punished by the end of the year emphasis on clearing out losing positions. In looking ahead to 2019, probably the most important economic concerns will be the ability for consumer spending to hold up, interest rate policy and how many times the Fed decides to raise rates (or not), and the lingering questions of trade relations and tariffs. There is probably no need to spend much time on the regulatory front as gridlock in Congress and preparation for the 2020 campaign will occupy most of the politicians time, so investors can pay more attention to company performance and items specific to their holdings.
Global Economic & Financial Markets Outlook:World Markets Remain Negative As Fears of Slowing, Interest Rates, and the Oil Selloff Hurt Sentiment! (Country index data provided by the Wall Street Journal, November 29, 2018.)
Nowhere to run, nowhere to hide is the most accurate way to size up this years equity results across the globe. Maybe investors are reacting to rising interest rates, or weakness in some of the economies run by more authoritarian type regimes (Turkey, South Africa, Venezuela come to mind). Certainly, the dramatic fall in oil prices presents a major problem for countries dependent on production for the vast majority of their revenue and tax base (Middle East, Venezuela, Russia). The escalation of the tariff tiff between the U.S. and many of the largest, mature economic countries in the world also has been a factor in the selling. As we head into the new year, none of these questions have been resolved so it remains to be seen how the psychology changes over time for investors rattled by any number of concerns. Let’s take a look at some of the specific regions, shall we?
In Asia, China (-20.8%), Shanghai (-22.1%), Japan’s Nikkei (-7.8%), the Philippines (-13.4%), Singapore (-9.2%) and South Korea’s Kospi Index (-14.9%) have all been major pain sources, as has Hong Kong (-12.0%). India (+4.3%) has been a standout, as has New Zealand (+3.3%), merely because of positive returns in an otherwise dreary geographic places (for returns). Similarly,, Europe’s major countries of Germany (-12.5%), Italy (-12.4%), France (-6.2%), Belgium (-12.4%), the UK (-10.0%), and Spain (-9.5%) all have joined the pain party, with only Norway (+6.5%) and Hungary in the black. In the Western hemisphere, Brazil has been the big winner (+15.0%) with Canada (-7.8%), Mexico (-19.3%), and Chile (-10.0%) all in the red as well. So you can see, with a month left in the calendar year, there is plenty of room for improvement among global index returns. Usually, when there is this much pain, forced selling becomes an issue as the year wanes, so that might be something to keep in mind as well.
The Art of Contrarian Thinking-Staying Or Going In A Changing Business Is Not An Easy Choice! (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)
One of the hardest things to accept as an equity investor is that nearly all of your holdings have businesses which are changing in some way. Since nearly all public companies are focused on growing their revenues, cash flow, and income (if not you better find another company), as an investor, often times you have to make a decision about whether or not you want to continue owning a company where what they are trying to accomplish may take two or three years. Many entities might be undergoing large capital projects where buildings may take tens of millions of dollars to raise and then put to use in construction. It may be a software company, as an example, which has to update their code for the latest version or variation to an established platform, or maybe add new modules to the current product line. Another situation would be the case where a company is buying or merging with another business. Combining these two organizations takes time to right size the new entity and integrate the cultures in an efficient way. In all of the previous examples, an equity owner has to be willing to either endure the long time frame of waiting for these situations to evolve so that the end result is a more efficient and profitable company, and face a situation where the stock will probably not perform during this period.
As a shareholder, much of this depends on your time horizon on when you are expecting a return on your investment. Many companies have multiple projects in the pipeline as a way to grow, depending on the size of the business. The larger the business, the more new projects they need to maintain or increase their growth rate. If the length of time needed for a company to finish corporate actions is far longer than when you need your money, or a return on your capital, obviously holding might not be the best option. If you have already owned the stock many years and have not seen a return yet, your patience may already be exhausted. There is a good reason why many great investors (Peter Lynch, Buffett, etc) believe if you need invested money for a length of time shorter than five years, it probably should not be in the market. It is not easy to constantly be told you have to be patient with investing, however, unfortunately it is the truth. It is a patient person’s game, truly a marathon and a long slog, but if you are patient, and the result is a five, ten, twenty bagger (or more), the patience can be well rewarded. Sticking with a changing business is not an easy choice, but it is one you will have to become accustomed to as a long term investor.
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 CF credential in no way suggests performance will be superior than a market index or market return.