Marketline Monthly – May 2018
May was another volatile month, but this time prices resolved on the upside, especially for technology stocks. The market dealt with tariff and trade war talk, uncertainty over whether the North Korean summit would actually happen, looming mid term elections, slowing growth in Europe, and of course, rising bond yields and company earnings reports. All in all, that we were able to close with positive numbers at all was testimony to the underlying strength in this stock market. The Dow rose 1%, the S&P rose 2.2%, but the Nasdaq was outstanding at 5.3%. Facebook’s recovery and other tech companies reporting strong earnings helped propel these stock prices. There’s no doubt that earnings are supporting US stock prices, even while interest rates creep up. As we have said many times before – in the end stock prices tend to follow earnings, not political developments or even the broad economy.
Last month we mentioned that food stocks and some REITs were becoming pretty cheap. After conducting due diligence on a number of food companies, none of them quite made the cut. The packaged food industry is in a revolution away from processed foods with household names such as Kraft, and towards organics and small niche providers that might specialize in just one item. Meanwhile grocers are desperate for traffic, and since shoppers want those niche products, shelf real estate is shifting that direction, hurting the large companies. Most of the small companies gaining market share are privately held at this point. Meanwhile, in the REIT arena, we elected to add to positions we already own rather than breaking new ground. Our array of existing companies spans hotels, retail, timber, and health care, with a smattering of office/industrial. The only area of substantial interest for further additions is retail, but with bankruptcies looming for many retailers, we’re in a wait and see mode for now.
Bond rates eased last month, dropping a few basis points across the curve. On the long end, the yield neatly bounced off about 3.20% to close at 3.03%. This decline in yields back to the favored 3% level came about as growth in Europe appeared to slow; and it happened despite a continuing decline in foreign purchases of our federal debt, AND higher deficits in the US. We have always been wary of the argument that if our deficit spending grows too much, foreigners will stop buying our bonds and our interest rates will spike. This is one of those things that seems like it ought to make sense, but doesn’t seem to work in real life.
Behind the scenes, a strong employment picture but restrained wage growth and now, a decline in energy prices is supporting rates at somewhat lower levels than prevailed just a few weeks ago. At this point, it’s hard to tell if we’re going to take another run at 3.20% on the long bond, or not. Stepping back for a moment to look at the forest instead of the trees, it is remarkable that this late in the economic cycle, with the deficits we are racking up, interest rates are still only three percent on a thirty-year commitment. Undeniably, something has changed in the last few years to make interest rates less reactive to economic phenomena: we think part of the answer lies in demographics, part of it lies in the feedback loop that high debts themselves create in economies, and part lies in the manipulation of this market by agents such as central banks. Only the latter stands to change. We’ll see how much of a difference it makes.
Overall the rest of the world generally fared worse than the US. Brazil was walloped, down over -10%, but this country is a notoriously volatile ride. Emerging markets overall had a rough time, as appreciation in the US dollar made it tougher to pay back dollar denominated debts. We don’t track Argentina, but it has applied for financial help once again from the IMF. Trade issues and an upcoming election hurt Mexico which was off -7.7%. The Nikkei and Hang Seng clustered together, each down about a percent, while Europe and Canada both rose around two to three percent.
Marketline Monthly is produced by Cascade Investment Advisors, Inc. We specialize in value investing for individuals. We apply our approach across markets, looking for low-priced securities that offer above-average potential. We use imagination and hard work to bring performance and personal service to our clients. To learn more, contact Michelle Rand at 1.503.417.1950 or 1.888.443.9015; email to Michelle.Rand@cascadeinvestors.com. Our website is www.cascadeinvestors.com. A full list of stocks we invest in is available on request; mention of specific securities is not investment advice; such investments may or may not be profitable.