Marketline Monthly – September 2018
While slightly subdued, both the Dow and the S&P 500 still crept to records. The Nasdaq declined as tech stocks ran into trouble, which manifested in semiconductor makers particularly. Trade barriers are expected to make life difficult for semi stocks until the companies adjust supply chains. The numbers on the Dow and the S&P were 1.9% and 0.4%; the Nasdaq lost -0.8%.
Stocks remain slightly higher than fair value. PEs in technology are very high, which skews the number for the S&P 500; looking at the dispersion of valuations inside the market shows that a substantial swath of companies are selling for less than 20 times earnings. Dividends have been climbing, too, and revenues are increasing after a long stagnation in many industries.
The most consistent phenomenon lately has been bearish pronouncements by strategists of all stripes. While surely there is a bear market somewhere in the future, it’s hard to predict when. The market could rise another 15%, and fall from there; or it could continue rising for years. Looking back at other significant bull markets, some lasted 15 years or more. We count this bull market as starting around mid-2013; others say the start date was even later. That makes this bull young, not old. Still, no one should be tempted to press either the accelerator or the brake too far to the floor; best to remain invested in the way that suits your circumstances long term, rather than trying to capitalize on a “good time” or a “bad time” in the stock market.
This month marked a change in the bond market for the first time in years. The long bond rose to a yield of 3.21%, a big jump from last month’s close of 3.02%. That 3.21% level is a ceiling created over the last several years, off which the bond has bounced time and again. At this writing, the yield finally broke through that level. Short rates rose as well. The one year bill is selling at 2.56%; the ten year is at 3.06%. While there’s been much talk about an inversion of the yield curve, it’s looking more like rates are normalizing with the curve slightly positively sloped. Now that the 3.22% yield has been breached, we think the trend in yields will be slowly upwards, depressing bond prices. The silver lining in this equation is that anyone looking for income has a much easier time of it. Investors over-weighted in stocks also have an opportunity to rebalance by trimming positions to reinvest in bonds. Timing is everything however, and we think it might pay to wait before jumping to bonds from stocks on the margin.
In sector news, not much has changed since last month. The one notable item on the horizon is stress in several emerging markets and even over in Italy, all of which is being reflected in bond prices. Political failures have generated terrific budget shortfalls, profligacy, and yet – shortages of basic services in Brazil. Meanwhile, Argentina is imploding as well, and we don’t even need to mention Venezuela. These countries are experiencing ever higher inflation and bond yields, putting the brakes on their economies. Italy has its own political frailty since the recent election; every few days one of the newly empowered questions the whole idea of the Euro, causing markets to rock uneasily. Italy’s bonds are marching to their own drummer, having decoupled from the rest of Europe. These exploding yields bear watching: there’s a marked feedback loop into the world economy when developing markets sag. This was apparent in the US from 2015 to 2016, and it may happen again.
Speaking of feedback loops, Christine Lagarde, head of the International Monetary Fund, has warned recently that global growth is on a slowing track. She is referring to China and emerging markets. Trade barriers may be contributing to slower activity in these geographies. Reflecting some concerns, foreign markets were mixed last month. The Nikkei was in the ‘strong positive’ camp, up 5.5%, but the Hang Seng hung back, down -0.4%. Canada also dipped, by -1.2%; this market is down about -1.5% this year, after a couple of strong years. Mexico was about flat. In Europe, the markets managed a nice 1% gain despite the occasional disruption from Italy. For US investors, foreign stocks have been frustrating this year, as the dollar’s rise has robbed value from foreign holdings. This is not a reason to jettison all international exposure, since the relative performance can change any time, but it does offer an explanation for slack performance in diversified portfolios this year.
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.