The world is a dizzying place. On the news, pundits discuss world events and sway our emotions. Social media keeps us hopping as we seek to keep our friends aware of what we’re eating for lunch. Information bombards us on every corner. Got to keep hustling! Investors face a similar situation. Several weeks ago it was China trade, Italian elections and Spanish politicians. Last week was the G7 show with all its posturing, soundbites, tweets, and counter tweets. This week it’s North Korea this, and struggles over a Yemen port that. And isn’t the Fed about to raise interest rates later today?
Enough! Why not stop by Starbucks, grab a hot cappuccino? Grande, since we don’t want too much caffeine affecting our judgment. Then pause, sit back and just enjoy the moment. It’s helpful to return to the concerns of the market later with a clear head, asking “What is really going on? What is important and what will drive the market, higher or lower, from here?”
This morning, The Ignorant Investor has been focused on the fundamentals driving the market’s current run: strong earnings (peak earnings apparently hasn’t occurred yet!) and solid economic data amid relatively (and inexplicably?) subdued wage growth (read about how slow wage growth can also affect consumer debt in this article by NBC). This while the economy runs hotter as the United States nears full employment. Finally, upcoming company stock buybacks following the quarterly earnings reporting lockup is helpful too.
Jobs outnumber job seekers in the United States. Read more about this at CNBC. However, The Ignorant Investor would like to note that there IS a difference between the reported U-3 and U-6 unemployment rates.As a whole, the S&P 500 really hasn’t done that much since the beginning of the year. However, an undercurrent of flight to quality, escape from sectors vulnerable to trade spats and interest rate hikes, and simple sector rotations has “hidden” from the broader market performance some extraordinary gains in Energy (up about +13% in the last three months; "smart money" has been buying up energy shares. Read more at Marketwatch) and so-called small cap companies (the Russell 2000 has been outperforming recently!). The age-old favorite of Technology has also booked very strong gains and remains the 2018 leader. Surprisingly, tech is now closely followed by 2018’s second-best performer, Consumer Discretionary; more on that below. The biggest winners from rising interest rates has unsurprisingly been the banks. At the same time, Agriculture companies seem to remain the most vulnerable to international trade spats (for example, soybeans wrt to China as The Ignorant Investor forecast in his March 27th post). Recently, Whisky and Apples - among other goods - have also become targets with the EU, Canada, and Mexico.
Counter tariffs. Quick, easily followed breakdown on counter tariffs that Canada, the EU, and Mexico have planned as part of "dollar-for-dollar" responses. Details at the BBC.Earnings have also driven investor sentiment. The meteoric rise in select consumer discretionary companies last week is particularly striking (by "select", we are talking about retailers who appear to be not only surviving but thriving in a post-Amazon world. Investors recently bought up Five Under after seeing solid results- Marketwatch showed one analyst's practical comparison between Five and Amazon products). If you are interested in this last sector, The Ignorant Investor suggests waiting until complications from trade tensions are clearer and euphoria has fallen before talking with an investment professional about taking the plunge.
Quality is the name of the game here, however. Quality. Exceptional earnings, strong full year guidance coupled with evidence of growing market share (growth), and a solid share buyback strategy will usually result in a stock that rewards investors (Restoration Hardware Holdings – now RH – performance just yesterday seemed to fit the bill. Earnings details and commentary by the company available via Businesswire).
Dark storm clouds on the horizon
Geopolitics. The chance for armed conflict with North Korea abates. This week, the news has been dominated by the historic event of President Trump flying to Singapore to meet with North Korea’s Kim, with the hope of sealing some sort of denuclearization agreement for the Korean peninsula. Any move towards peace should be applauded and removes or at least forestalls a potential black swan event. Read more about the denuclearization deal at Bloomberg.
Trade. At the G7 meeting last week, President Trump chose to play hardball with some of the USA’s closest allies and trade partners, with acrimonious accusations – some valid, others less so – flying in multiple directions. The questions investors must ask themselves is how these potential issues or an increase in protectionism on multiple fronts will directly or indirectly affect the performance of companies in their portfolio. Admittedly, agreements are expected to be reached and the chance of any real trade disruption is considered small. However, the chance for potential trade disputes now stretches beyond China.
Trade war unlikely. Despite all the noise and actions around trade, tarrifs, and rising protectionism, analysts are not expecting a true trade war to break out - at least not yet. However, there can still be ripple effects across the global economy. The analysts in this article by Bloomberg expect the real effect from recent actions to affect business confidence.Treasuries. US Treasury Yields rose sharply several weeks ago, crossing above the all-important 3% threshold before falling as geopolitical tensions rose. Remember that Great Money Printing Experiment? Investors who were forced further and further out on the risk curve could start to reconsider their personal capital allocations as that Treasury yield gets higher, causing funds to flow away from the equity markets. When the seas rise, most boats also rise with it. When the seas fall, quality in specific sectors is revealed.
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Following up and filling in the blanks
Guilty as charged. Back in February, The Ignorant Investor talked about the unknown VIX whale that made a real killing (to the tune of $200M) after volatility returned to the markets. The whale has now been identified as Goldman Sachs- read more at Marketwatch. Some individuals at the GS trading desk can look forward to a nice fat bonus after that result!
CRISPR and cancer. Related to our April post, several studies just published in the respected Nature magazine indicate that gene editing with CRISPR could possibly cause cancer. This unexpected news has caused the stock of some drug discovery companies in the space to start on what may be a wild ride. The New York Times has a great article on the this issue.
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Market developments have been coming fast and furiously over the past four weeks. The Ignorant Investor plans to post more frequently going forward, perhaps two or three updates per month depending on news flow and personal scheduling.
