Y H& C Investments Monthly Newsletter- June 2018 Edition #120


US. Economic & Financial Markets Outlook: Tariffs, Tight Job Market, and Rising Rates Limit Market Gains as Earnings Remain Strong!  (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 May, the Dow Jones Industrial Average rose 2.03%, the S&P 500 gained 2.87 %, and the NASDAQ increased 4.99%. As the country heads into the summer season, markets are caught in the middle of a psychological dilemma. On one side of the brains is the knowledge that corporate earnings were strong across most industry groups. The other side of the noggin is concerned about tightness in the labor market and Federal Reserve Board policy which has long indicated that interest rates are headed higher. The result of the mental battle is volatility has picked up over the last few months.


With respect to the various segments which make up the market, as I have long stated, the most obvious candidate to benefit from higher interest rates should be across the financial services space, but that has not played out at all (so far). The consumer discretionary and retail areas have been sporadic, with much depending on the specific company’s unique circumstances and business outlook. Technology is where a few market leaders reside, and interest in the area is strong. Utilities and anything real estate related (primarily REIT’s) remain scorned because of the interest rate outlook (more competitive bond yields). The venture capital and private equity domains are still flush with capital with some recent IP-O's providing liquidity for those seeking an exit. Dollar strength will be an issue in the future earnings season, especially for multi-national companies with the majority of their sales overseas. In combination with the uncertainty on the outcome of talks regarding trade with China, NAFTA, and the European union, there are legitimate questions about whether trade wars in a wide variety of areas could be on the horizon. As for valuations, trading at below 17 times forward earnings, not excessively expensive or overly cheap, the broader market is probably fairly priced. In sum, choosing wisely (or trying to, anyway) about positioning and sector remains critical for those of us willing to try and take advantage of the sleepy summer season.


Global Economic & Financial Markets Outlook: Global Equities Retreat As Dollar Strength Provides A Headwind!  (All country index data provided by the Wall Street Journal May 31, 2018.)


As equity markets across the world have recently experienced some weakness, many analysts look to find the underlying reasons why so as to determine if the trend might persist or reverse. Macroeconomic forecasting is usually very difficult because of the number of important factors which must be considered, and they also may be indeterminable. For example, the idea anyone, or anything, including algorithms written by analysts but executed by powerful computers, can accurately forecast the GDP growth rate, or its change, of mature countries or regions like the United States, North America, England, the UK, Europe, China, or Asia is fanciful at best and highly unlikely at worst.


Still, there are factors to look at, and one is the relative strength or weakness of currencies. The largest one globally, dollar, has strengthened over the last month versus the Euro, Yen, Pound, Peso, and Yuan. How much equity weakness can be attributed to dollar strength? It depends on how much weight in your algo you give to currency importance. My own view is currencies typically account for 5-10% of a market move, if the currency yearly change is not extreme. Of course, there are ways to mitigate currency risk, usually with forward contracts and these are most often used by large corporations. Anyway, in looking at most major international equity markets, year to date the current typical performance is in a range of a 0-5% loss, with a few outliers around -10%. Plenty of time for markets to improve, or correct even more, with a little help in the foreign exchange (currency) area as well.

The Art of Contrarian Thinking-Facing the Music- Companies Have to Give Investors Reasons to Buy Them! (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)


With the winner take all nature of today’s equity market, companies which have results that are viewed as average or sub-par, especially with respect to growth, are often discarded in an abrupt manner, meaning sold. Further, the selling can be non-stop and relentless, so the stock can fall a large percentage in a short period of time. Owning these situations is hard to avoid in a difficult market, as very few investors only own businesses where everything is going well. Consequently, if you own individual stocks, there will usually be a few which have unrealized losses. So how do you handle these situations?

First, you need to know the plan and time horizon of the company to improve the business operationally. Speaking from a tactical standpoint regarding your portfolio management, if it is over a year, you can always take the loss by selling the stock, and if you still believe in the business, buy it back in 31 days or more. Second, you should only expect investors to buy a stock if the results are impressive, meaning good revenue growth, solid margins (hopefully expansion), and steady or improving cash flow. Third, the results must be consistent quarter after quarter. One good quarter is only a beginning, but if you expect a stock to have consistent performance, it will need two, three, four, five (or more) straight releases of good numbers. As an example, Starbucks had over 20 straight quarters of 5% same store sales growth, and the stock went on a huge run. Once a company is going well, they can perform for years at a time (like an Apple, Google, or Amazon). The bottom line is there is a direct correlation between financial results and stock performance, and with underwater positions, only expect to do better if the company’s financial results improve. Thanks for reading the monthly newsletter and good luck with your investments!


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 CFA credential in no way suggests performance will be superior than a market index or market return.