Longer to Rise, Faster to Fall - Weekly Blog # 544

Mike Lipper’s Monday Morning Musings

Longer to Rise, Faster to Fall

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

One of the most critical tasks for good analysts is to anticipate both the near and far term futures. We know that we will be wrong some of the time in terms of direction and frequently and will be in error on the numbers themselves. We take comfort that our fellow prognosticators, the weather people, are still employed. Both of us tend to have better records than either economists or politicians. The reason for the better record is not that we are brighter, but that we are constantly looking for surprises that could cause trend reversals. The others are much more comfortable in extrapolating the present into the future.

Each day and each week I look for potential surprise elements that I occasionally share with you. To put some perspective into my observations I place my views in different time slots, which may be useful to our subscribers even if you haven’t adopted our sub-portfolios of different time spans.

Most of the US market indices are near their historic previous high points but appear to be laboring in an effort to go higher. My friend, Byron Wien, said that the “market could move somewhat higher, but that a major surge is unlikely”. Byron was not in the US Marines with me training in the undulating hills. My experience is that it takes a long time to get up a steep hill, but the fall on the other side happens quickly. This matches our historic market experience and reinforces my belief of identifying different time spans for different tactics. The rest of this blog contains inputs that I received this latest week, broken down into times when they appear to be most important.


Need for Operational Cash or Short-Term Considerations 

The picture is mixed as shown below:

• September slow-down in sales orders

• Jump in wholesale inventories (could be tariff or price increase related)

• Generally rising stock markets in US, China, and Japan

• Closing daily stock price gaps for DJIA and S&P 500 

• Center parties losing some power in Germany, France, and Italy

• US restaurant shortage of experienced staff

•  Of the larger investment objective averages, the following beat the S&P 500 index funds for 2018 year to date: Small-Cap Growth, Health/Biotech, Large-Cap Growth, Science & Technology, Mid-Cap Growth, and a number other popular fund objectives. Leader-ship is broader than just the FAANG stocks.

• Only three types of fixed income funds gained over 1% on a total return basis year to date: Loan Participation, High Yield, and Ultra Short Funds. As with most other fixed income funds, net asset values were flat or down, leaving only their dividends on the positive side.

• In the past week, five of the six best performing indices were commodity related indices. The two best currencies were viewed as commodity currencies. 

• There was a significant slow-down in net sales for the world’s open-end funds between the first and second quarter. According to a compilation done by the Investment Company Institute, the $584 billion net sales in the first quarter was down to $194 billion in the second quarter. This was materially less than the $609 billion in the second quarter of 2017. Even so, the fund industry is a powerful force in the investment markets, with global total assets of $53 trillion.    

Until the End of the Next Recession and Market Decline:

• Byron sees the next recession after the 2020 presidential election, but the stock market may anticipate earlier.

• Jeremy Siegel, Wharton Professor and Consultant to Wisdom Tree (*), believes “stocks are overvalued and bonds are enormously   overvalued on a long-term basis.”

• Studying mutual funds since the 1960s and knowing their history before then, it is very rare to find a professional investor that es-capes a major decline and then is successful in re-entering the stock market at a propitious time. Cash makes us too comfortable.  

Legacy Investing: Stay in the game

• John Authers, one of the most read columnists in the Financial Times, has written a column on what he has learned from investing his fund journalism prize in 1992 and the good record it produced. He invested in a mutual fund which had a good investment record, which he continues to hold. The points he has learned are: 

• There is not a great deal of difference in performance over the long-term between an actively managed middle of the road fund and an index fund, if it existed at that time.

• He and most investors have a home country bias.

• One should expect portfolio managers to change and for there to be changes within the management company itself.

• Jason Zweig, another old friend, recounted in the weekend edition of The Wall Street Journal that there are periods when various markets outside of the US perform better than the domestic market. He believes that the trend of US investors investing in funds invested outside of the US will be rewarded. As pointed out by a manager at T. Rowe Price (*), foreign markets from a US prospective have less tech growth stocks and thus their markets are selling at a lower valuation.

• I have made the point to an investment group that I participate in, that currently a good way to hedge US holdings is to invest long-term into China, either directly or from my standpoint thru mutual funds.

My Conclusions:

Investing is like predicting the weather. It’s almost impossible to predict the levels of the market, particularly with shifting levels of sentiment and liquidity. Getting the trends right is often the best one should hope for.

As most artist’s don’t exactly know which of their works will achieve lasting acclaim, we should recognize that it is at best an art form or an intelligent gamble when properly managed.

Investing with different approaches for different time spans allows one to have more tools than a single portfolio with a single strategy.

At the moment I believe we are climbing a wall of increasing worries. It’s like climbing a series of difficult hills, always aware that most declines are marked by surprises which lead to a quick fall.


Question: how do you see the long-term outlook?


(*) A long position is held either in a private financial services fund or a personal account of mine and do not represent a recommendation

 
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