US Economic & Financial Markets Outlook: Consumer Spending Lifts US. Economy As Inflation Concerns Test Investors! (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 January, the Dow Jones Industrial Average gained 4.80%, the S&P 500 rose 4.05%, and the NASDAQ grew 5.06%. When the fourth quarter 2017 gross domestic product reading came in at an annualized rate of 2.6%, many investors thought the result was a case of poor performance, especially versus the expected three percent figure. Looking under the hood, however, one would see that consumer spending grew by 3.8%, its quickest rate in over a year. A better than anticipated holiday shopping season is seen as the primary reason for the strong spending (shock of shocks, right?). Restraining GDP growth was a wider trade deficit, but expansion was helped by a good housing market and strong residential construction (10 year high in 2017). All in all, 2017 turned out to be a fine one for the US. economy, and it certainly was reflected in the performance of all major stock market indexes.
With 2018 upon us, the year certainly started strong, in the financial markets, anyhow. Most investment analysts are in agreement that the dreaded I-word (inflation) continues to move towards the head of the line as potentially the most troublesome issue for markets to contend with, both in the immediate and mid term time frames. Oil is trending towards $70 a barrel, tax cuts were passed, and as you saw, spending is quite strong. Anticipating these trends is the Fed, which has more than telegraphed its hand (dot plot) of two or three increases in short term interest rates during 2018. At the long end of the yield curve, the ten year rate now sits at 2.7%, rapidly approaching the three percent level some see as a nice alternative to other high risk assets (hmm, what might those be?).
As for equities (speak of the devil), many issues have seen massive gains over the last decade, and valuation remains a big obstacle to continued appreciation. In the most highly thought of enterprises, the earnings power, as well as the price paid, is enormous. Any kind of inflation, geopolitical event, specific business problem, or rapid increase in interest rates (unexpected, no doubt) could cause investors to rethink the sustainability of growth rates, which might chop valuations to a more, shall we say, earth bound level. Right now, all seems good, but usually, history has proven price discipline remains important when thinking about investment opportunities.
Global Economic & Financial Markets Outlook: World Markets Roar Into 2018 With Strong January As the Baltic's, Russia, and Asia Lead the Way! (All country index data provided by countryeconomy.com, January 31, 2018.)
Global markets resumed the trajectory they exited 2017 with by trending higher in January. Advances in major geographies generally came in at 3-5% for the month, but even stronger showings took place in countries like Russia (+8.09%), Macedonia (+11.25%), Slovakia (+7.29%), and the well known juggernaut of Lithuania (+11.7%). You also shouldn’t forget about places like Kazakhstan (+7.70%) and Romania (+7.86%) either. Better known areas such as Hong Kong (+9.92%), Brazil (+10.58%), and Argentina (+13.89%) were clearly outstanding. Still, the best performing global stock indexes among countries with relatively stable economies (clearly Venezuela +203.75% for the month wouldn’t count) came from the remote African country of Ghana, ahead by 18% in the first month of the year. Apparently, the 2017 consumer inflation level came in at a paltry 11.8%, worthy of a 100 basis point reduction in interest rates to the low, low, low level of 20%. You see, these large absolute returns come with the caveat that they must be viewed in conjunction with inflation rates, the country interest rate, and the exchange rate of the currency. Like everything in economics (and life?), there is always more than meets the eye.
The Art of Contrarian Thinking-Don’t Judge the Worthiness of An Idea By the Size of the Company! (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)
Recently, I saw a highly popular investment columnist remark that just owning the machines (technology based companies) is the appropriate investment strategy (for him maybe). These kinds of blanket statements about asset allocation oversimplify investment strategy and give little mention of the merit of plenty of small, mid sized, and even larger entities not related to the tech area. It is based on the idea of keep going with what has been working. Clearly, it was successful in 2017, and who can argue with up 30%? Of course, not every year will one sector, heavily weighted with a few massive companies, handily outperform the many other areas of the market which also have fine companies. More pertinent issues, like the price, quality, and management of the specific business you are looking at, as well as it’s current valuation and growth prospects, certainly should be a top priority (in my mind), or at the very least, be considered. Just as crucial, it fails to consider the idea that business quality and investment merit are not constrained just to large companies. In fact, many of the best performing investments over the last century have belonged to small banks, insurance companies, and plenty of other unique enterprises in sectors where they were able to thrive and succeed for decades with very little attention paid by the business press. Investment merit and results, in the case of the vast majority of firms, can be found in a multitude of places and sizes, not just big technology firms.
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 CFA credential in no way suggests performance will be superior than a market index or market return.