Here is our monthly view of the financial markets and some of the thoughts that go into our investment decisions.
As we look back on 2019, the headlines were terrible. “Trade Wars”, “Impeachment”, “Iran”, “Brexit” and “China” dominated the news cycle. Add to this the cacophony of pundits talking about “recession” and it is no wonder that investors pulled $135.5 billion out of equity mutual funds and ETFs during the year. It has been the largest withdrawal from stocks since 1992. Yet, the US stock market performed well in 2019. Who was buying? Corporations continued to buy their own shares and non-US investors flocked to the safer shores of the US. Some lessons were learned. First, when it comes to the stock market, the conventional wisdom is often wrong. Second, the headlines are not good barometers of the right time to invest. If you have a long investment horizon, trying to time the market or “waiting until the coast is clear” can cause investors to miss good years. Steady, continuous investing through the ups and downs and through the uncertainties has shown to be the best long-term strategy. The market is difficult to predict because there are so many factors that go into stock prices. For instance, a reasonable criticism of the market is that corporate profits have been down for three consecutive quarters. Lower earnings should mean lower stock prices. However, earnings, while critical are not the only input. The level of interest rates is also important. In 2019, declining rates have offset profit concerns allowing stocks to rise. In addition to the many factors, markets reflect the future. Stock prices anticipate future events. Some say 6 months in advance. Perhaps the stock rally over the past week is telling us that the recent streak of lower corporate profits is about to end. The commentators will fill in the blanks with reasons after the market moves. So what’s in store for next year? The pundits will once again throw out their “Up 10% Forecast” which almost never happens. I won’t attempt to make any predictions but I will make some observations. There are parts of the market that have underperformed for some time, namely financials, small-caps and emerging markets. Recently we have seen these sectors pick up. They are under-owned by Wall Street. Seems like this could be a set up for these areas to do well. Along with financials, energy and retail are very unloved. We know the reasons. Fossil fuels are destined to go away. Amazon will destroy all retail. As we noted earlier, given the conventional wisdom is often wrong, these corners of the market might be worth looking into. Oh; let’s not forget about the $135.5 billion that abandoned stocks? Will some or all of it come back? As the Presidential Election moves into earnest, all sorts of fears will swirl in the press. I encourage investors to stick to their financial plans and asset allocations and stay on track. I wish everyone a meaningful, quiet, peaceful and fun season of holidays. — Ian Green, Pendragon Capital Management
It’s hard to believe 3/4 of 2019 is already in the books. The lingering trade war with China and the prospect of more trade wars with Europe and any other comers has created uncertainty in corporate boardrooms and with investors. As a result, the US economy has not been able to sustain the momentum it had following the revamping of the corporate tax code. In fact, some of the recent data is more concerning than just a loss of momentum. Last month the ISM Manufacturing Index came in at about 47, the worst reading since 2009. A reading below 50 means that US manufacturing is contracting. In response to weakening signals in the economy, the Federal Reserve cut interest rates for the second month in a row. Fed action and continuing signals from The White House that a resolution to the trade issue is imminent, has kept the stock market from falling. Having said that, following the ISM Manufacturing report the Dow Jones Industrial Average declined over 300 points. This begs the question, “How long will the market remain patient with the back-and-forth over trade?” While trade is most likely the primary concern for stocks, there are two other factors that I am concerned about. The first is Brexit. On one hand, the UK economy is not nearly as big nor as important to global growth as the US or China. Any damage from a UK “crash out” should in the intermediate and long-term be relatively benign to the global economy. However, economic activity is set on the margin and any fall-off in global demand will be felt in the short-run. The second bearish observation to note is the failure of WeWork, a darling of the private equity unicorns, to garner enough investor interest at the desired price to pull off an IPO. While much as been written of the high valuations of the FAANGs, the most over-valued space in the marketplace looks to be in private companies that have gripped the private equity and venture capital world with the promise of “disruption”. Each new round of private financing brought, on paper and within the private capital world, higher and higher valuations despite little or no profits. The public markets are more discerning. Recently, when the private investment world has ventured into public offerings, the results have not been good. Uber, Lyft, Slack and others have seen their stock prices drop significantly since their IPOs. Public investors want to see a path to profitability. They also are not happy with stock offerings where the proceeds go to the private owners, not the company itself. Why buy from an insider who is selling? Bull markets end when excesses become extreme and investors finally pull back. It is possible we are witnessing the beginnings of a re-pricing of companies. I’m not suggesting the end is here. I think a trade deal will come and the market will rally. However, I am concerned that the late innings of this bull market are close if not here. — Ian Green, Pendragon Capital Management