Successful Investing Amidst Change and Uncertainty
What does it take to be a successful investor in a changing and uncertain environment? While it is difficult to stay focused on investing for the long term when bombarded throughout the day by negative comments by the pundits/experts on cable news and other media outlets to the day’s events, you must pause to review the facts. Then, reflect on what they mean for today and portend for the future. Finally, follow it up with research before investing. This has been our tag line over 45+ years, as Chief Investment Officer and Partner at some of the most successful firms in money management including the Quantum Fund.
A successful investor needs to develop and stay aligned with a long-term strategy based on a thesis comprised of core values and beliefs. We combine both a top/down global macroeconomic view with a bottom-up stock selection after our own independent research.
We begin with a view of monetary policy trying to ascertain whether the monetary authorities are providing more capital than needed by the real economy or not. Just look at how our view shifted once the Fed did a 180-degree turn just months after realizing the fallacies of their ways throughout most of 2018 into 2019-shifting from tightening to easing. We had turned highly defensive towards the end of 2018 into 2019 holding consumer stocks, healthcare, utilities and other high yielding stable growth companies as well as some technology only to gradually shift our view by the end of the summer 2019 beginning to add a few economically sensitive stocks selling at recession valuations but with huge free cash flow, high yields and with significant stock buyback programs in place. Technology was then and remains today the largest area of concentration in our portfolios, especially the semis. The biggest concerns in the marketplace last fall centered around trade, Brexit and Trump. Monetary policy would clearly remain overly accommodative.
As we ended 2019, it became apparent that the U.S and China would sign Phase 1 of a trade deal, USMCA would be passed as well as many other trade deals, Johnson was going to succeed and Brexit would finally happen later in 2020, and Trump would do anything/everything in this power as President to juice the economy so that the stock market would continue moving to new highs. Of course, our primary core belief then and still today was that all monetary authorities, including the Fed, BOJ, Bank of China and the ECB, would remain highly accommodative providing more capital to the system then needed by the real economy essentially forcing investors further out on the risk curve. It did not hurt that stocks were significantly under-owned as an asset class while bonds/cash were over-owned as safe havens.
We even wrote a blog in January 2020 titled “Start your Engines” as we were confident that the global economy would accelerate as we moved through 2020 due to all the monetary stimulus in the system, trade uncertainty had been lifted to a major degree after many major deals had been concluded, fiscal stimulus was being enacted in the U.S, China, Japan, India and other countries, and Trump was clearly doing what he could to keep our economy strong. All systems were a go!
Then the coronavirus hit. Wow, that was an unexpected punch to the gut and forced us to review the facts; pause, reflect and consider any mindset shifts; and finally do the research necessary before we could invest accordingly. Clearly growth in China would be hit as well as that of the global economy who count so much on China. But on the other side, we knew that all of the monetary authorities would again step up to the plate and provide even more monetary accommodation, if possible, than before which already was significant. In fact, China, alone, added well over $300 billion to their system in the last few weeks as well as lowered lending ratios so that corporations/individuals could get more capital as needed during these uncertain times. We have heard all of the other monetary authorities, especially our Fed, comment recently that that were monitoring the situation in China closely and would quickly step up to the plate and provide even more monetary accommodation as needed to offset the punitive impacts to growth from weakness in China and to supply chains. While we fully expected the coronavirus to have a short-term negative effect on China and the global economy, we wrote a blog titled “This Too Shall Pass”. Our view was that we needed to look over the valley as we did not expect the coronavirus to alter the long-term growth of China nor the rest of the world.
Notwithstanding, we made some short-term strategic moves acknowledging that global growth would be less than we anticipated in the first half of 2020 than initially anticipated. We adjusted our interest rate assumptions lower for the year too while acknowledging that the dollar would remain stronger longer along with the Japanese yen. Commodity prices would weaken, too, near term. While we did reduce some of the economic sensitivity in our portfolios, we fully expect to shift back to them over the next few months if and when we gained more confidence that the coronavirus was getting contained or their stock prices revert back to recession valuations.
While we did not alter our market objective for the year of 3400-3600 for the S & P, we commented that the market for the first half of the year would be supported by low-interest rates along with excessive monetary accommodation only to transition by mid-year to higher earnings expectations as global growth finally accelerated as the negative impacts of the coronavirus had peaked by the end of March which we still expect. We can already see that the Chinese government is forcing workers back on the job. Plants and stores are being re-opened except in the provinces hit hardest and quarantined by the government. We believe that growth in China will build slowly until the coronavirus is contained, but then return to near 6% growth for the second half of the year supported by continued excessive monetary ease in China along with an absolutely huge fiscal stimulus plan. After all, what is good for China will be good for global growth.
Interestingly, U.S economic growth may be boosted near term by problems in China as our net trade numbers will improve short term. In addition, the consumer, which is the backbone of our economy, remains strong as jobs are being created at an above-average clip while hourly earnings are increasing above inflation which remains tame; the highly stimulative U.S. budget deficit grew 20% in the first four months of fiscal 2020; Trump was acquitted by the Senate; the Democrats appear in trouble; the Boeing 737 Max may be return to production before the summer; and all the trade deals will kick as the year progresses too. Pretty good story going into election. Right now, we are predicting a Trump victory. Can you believe that Trump is considering tax incentives for more Americans to buy stocks? Wow!
We now expect first quarter U.S. GNP to exceed 2% only to recede in the second quarter but then re-accelerate to 3+% growth by the fourth quarter into 2021 as the trade deals kick in and Boeing begins production of the 737 Max. We have not changed our fourth quarter S & P earnings rate of $180/ share nor our current forecast that the 10-year treasury will be yielding 2.0% by year end. Therefore, we remain confident that the stock market could hit 3600 with a 20 multiple.
The key for our continued outperformance will be asset allocation along with stock selection. We continue to invest in best in class with superior managements, great long-term competitive strategies to gain market share along with improved profitability, very strong financials including free cash flow used to enhance shareholder returns and all selling beneath intrinsic value.
Our areas of concentration remain technology, especially the semis; global capital goods/industrials; financials; healthcare; housing-related retailers; low cost, financially strong industrial commodity companies, especially copper; and many special situations. We expect M & A to pick up this year too as funding costs are so low such that most deals are immediately anti-dilutive. We own no bonds and are flat the dollar.
Despite being Presidents’ Day, we will still be holding our investment webinar on Monday, February 17th at 8:30 am EST. You can join by entering https://zoom.us/j/9179217852 into your browser. Feel free to send any questions in advance to firstname.lastname@example.org.
Remember to review all the facts; pause, reflect and consider mindset shifts; turn off the pundits/experts who are not investors; look at your asset mix along with risk controls; do independent research and …
Paix et Prospérité LLC