I hope everything is well and you are enjoying the summer months.
In addition to the many moving pieces which affect investments in the global markets, there are an abundance of changes impacting each element. Information which is viewed as a given one day can change the next, making the market more dynamic than ever. Giving more credence on what I do know and less to volatile data, my current macro beliefs are:
1. The US economy should continue to expand.
2. The China trade situation is material in the minds of investors and continues to be a current drag on the valuation of companies involved directly and indirectly with China. The skirmish is a necessary obstacle in correcting China’s reported unfair trade practices, cyber and intellectual property theft of U.S. technology. Over time, the drag should dissipate with trade and prices recovering. However, this could be amprolonged process.
3. Overall US stock market prices are rich and do not adequately reflect the implication of our strong dollar on exports in a slowing global economy as well as the negativen growth effects caused by trade and geopolitical frictions.
4. Federal Reserve comments signal the possibility of an upcoming rate cut most likely as an insurance policy against trade tensions and slowing growth outside of the U.S.
5. The recession boogeyman is back in the closet, for now.
As we exited the second quarter, the stock markets exhibited strength as Federal Reserve Chair Jerome Powell bolstered the case for easier monetary policy in the U.S. His recent July 10th testimony to the House Financial Services Committee stated that current trade tensions and muted economic activity have dampened the U.S. economy’s outlook. However, he noted that the U.S. economy remains on solid ground. The current financial headlines and the previous statements seem contradictory, leaving many confused, but this difficult environment can create an opportunity for the savvy investor who know what they are looking for.
Digging into the S&P 500 Index quarterly return may give us insight into why so many investors are confused. As of the beginning of June, the U.S. stock market was down 2.7% for the quarter and many thought it was the beginning of a much more severe drop due to:
1. China trade tensions weighing on the stock prices of companies related to the conflict.
2. A tariff war with Mexico appeared imminent.
3. The Treasury yield became the most inverted since 2007, just before the beginning of the Great Recession.
In times of such disruption, stock markets usually retreat, but this didn’t happen this year. Realizing that investors were net sellers over the 12-month period that ended May 2019, I believe a round of performance chasing developed in June. Very likely, many of the investors which raised cash in May as a precaution abruptly changed positions and became buyers as headline news trade relief was reported. This is trading, not long-term investing, and can be dangerous to one’s financial health.
Despite the S&P 500 index having a positive return in the quarter, more than a third of its companies experienced negative returns during the quarter, which indicates to me that the largest most liquid names were being purchased.
Investors should be keenly aware that no permanent progress has been made on either the Chinese or Mexican situation. The outcome of the G-20 meeting was that China’s leader, Xi Jinping, and President Trump have only agreed to reopen talks; furthermore, the immigration deal with Mexico to avert tariffs is only under a 45- and 90-day review.
Investing is tough and can be compared somewhat to the vagaries of fishing. Just like in investing, one needs to be honest in identifying what one is attempting to accomplish. I have been to many fishing tournaments and often hear stories told about how someone was fishing in the same spot as the winner of the tournament but didn’t catch any big ones. When I asked why they were in that spot, they stated that they heard so and so was killing it there and catching whoppers, so they went to the same spot. This is similar to investing with many eager investors chasing stories and past returns, only to become dismayed after they realize that all the big fish are already gone.
If one is fishing for food to feed their family, it is probably best to continue implementing tried and true methods in areas they are familiar with rather than chasing. It can be nerveracking to be vigilant in turbulent times, but successful professionals in investing or fishing who are disciplined in their craft seem to continue winning over time.
Investors, professional or not, should be vigilant and not get carried away. Everything can seem fine until it’s not. Last Thursday after the close, a day after hitting its 52-week high of $380.76, Illumina, the global leader in DNA sequencing and array-based technologies surprised investors and analysts by reporting a preliminary revenue figure of $835 million, which is compared to $830 million last year and estimates of $888 million. The next morning when most investors had their first chance to sell, it opened at $310.25 down 19% from its high just a couple days prior when things seemed bright. This is a good example of how fast things change. In the case of Illumina, there are at least 15 institutional analysts who follow it with ratings of 5 at Strong Buy, 4 at Buy, and 6 with a hold rating. This sort of price drop is not that uncommon and happens no matter how diligent management or analysts perform. Many times, changes are unforeseen and unpreventable, and the hottest stocks can fall out of favor in an instant.
During the second quarter of 2019, the S&P 500 Index gained 3.8%, the NASDAQ Index gained 3.6%, and the iShares Barclays 7-10 yr. Treasury Bond ETF (IEF) gained 3.1%. T
he markets are fickle and can turn suddenly, so I am watching new developments closely and concentrating on companies with growth and that can be purchased at a reasonable valuation. My past experience continues to confirm that this investment strategy serves well for long-term focused investors. In the upcoming earnings reporting season, I will be concentrating on earnings conference calls to gain insight to how upper management perceives the business climate for the second half of 2019 and confirming and uncovering investments in areas of sustainable growth. One bright area of growth which was negatively affected in the second quarter but continues to look promising for a rebound is the cellular 5G buildout which operates at a higher frequency, meaning higher speeds with fewer glitches.
Another area of growth is digital health & wearable related companies and suppliers. To extend healthcare more economically and efficiently, devices and therapeutics today are becoming more digitized. As described by industry papers, wide-scale telehealth adoption, remote patient monitoring, and behavior modification programs can potentially improve chronic disease management and lower unnecessary costs. Digital healthcare, arguably nascent in many areas, can be doubly additive and transformative by making diagnosis, care, and prevention widely accessible (even “virtual”) at substantially lower costs.
The second half of 2019 should be quite interesting, especially as we get closer to the 2020 election year. To our existing clients, I extend my sincere thanks for your business. You have our continued commitment to your success. To prospective clients, I invite you to come and grow with us.
Very truly yours,
Martin L. Yokosawa