In the competitive world of athletics, politics, and investing, there are many participants who are mediocre or unsuccessful. Market-based outcomes revolve around a unique result which is difficult for most, but fabulous for those who are part of the victorious group, as there are few and in many cases, only one winner. But, oh, as they famously say, to the victors go the spoils. Consequently, when it comes to investing capital, one big winner can cover up a bunch of poor performers. The central issue becomes, how does one go about finding the big winners? No kidding, right? Not easy, not at all, especially in the current environment.
When revised fourth quarter GDP growth came in at 1.4%, market participants shrugged off the upward revision as a sign the Federal Reserve Open Market Committee may indeed decide to raise interest rates in April. Corporate profits fell 8.3%, but when backing out a large settlement from a major oil company, operating profits were down only 3.3%. Still, with four straight quarters of declining year-over-year profits from the largest companies, the lack of earnings growth makes it very difficult for equity investors to see sustainable gains. At the most basic level, investing in equities requires a higher return on one's assets for the risk, and if profits are not growing, or growing slowly, multiples typically come down. Of course, the pertinent issue is the specific asset (stock, ETF, etc) one owns and the price one pays. So, as the headline quote indicates, for ambitious investors, a key consideration is ignoring the macro environment in order to concentrate on what is crucial for success, the fundamental characteristics and advantages of the business one is buying (index, ETF, etc).
On a light week for earnings, Krispy Kreme (NYSE:KKD) met expectations but saw the stock price fall. Conversely, PVH (NYSE:PVH) and Signet Jewelers (NYSE:SIG) beat estimates and registered nice gains. The correlation between better-than-expected earnings and a higher stock price seems simple, but in the stock market, the obvious conclusion does not always hold true. Nothing is easy, and to come up with direct conclusions based on one relationship has lost plenty of investors a great deal of money, myself included. Experience teaches the trapeze artist to look before one leaps, and the same can be said with the capital markets.
The ongoing dispute between Apple (NASDAQ:AAPL) and the United States government about encryption and security remains front and center because of the severe outcomes from terrorist attacks. Text messaging giant Snapchat is also involved with this area because of encryption, as are plenty of other high-tech firms. You would think the most obvious conclusion would be to sit down in a room and hammer out a mutually agreed upon solution, but this requires leadership, and it seems there is not much of it in the world these days. On the opposite side of the equation, I was listening to an annual meeting this week, and at the end of the meeting there was a tough question from an ex-employee who was fired with a few years to go before their retirement. The CEO answered the question by responding in a way which made any observer understand why the company has been so successful. In any business, people skills and the ability to handle tough situations separates success from failure, especially over the long term.
In the political world, a place where a premium is put on media skills versus actually responding to people in a genuine way, Republicans saw a glimpse of why so many are so suspect about Donald Trump. His attack on the wife of Senator Ted Cruz reinforces the belief the Donald is a disaster waiting to happen in the general election. Hillary leads him by 12-15 points nationally and in every swing state that matters. Probably the best course of action is to firm up the defenses of vulnerable members in both houses and let Donald sink or swim based on his own political and people skills. Lots to look forward to if you are a moderate in either party.