Mike Lipper’s Monday Morning Musings
Pick Investment Period & Strategy
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
This is the 737th blog which shares my thoughts on different investment periods and strategies. They are different from each other and are partly triggered by Friday’s US stock market decline, which in the extreme took 10% off the average price of narrow industry groups. The views expressed are for the beginnings of internal discussions, not final conclusions which I would be happy to discuss.
Last Week
The 8:30 am Consumer Price Index (CPI) shocked some market participants, but really shouldn’t have shocked those who’ve visited retail locations. From the opening bell until the close stock prices fell. A significant price gap developed between Thursday’s close and Friday’s prices. Most of the time, significant price gaps are closed in subsequent trading before a change in direction continues.
Bullish traders could be overjoyed by Friday’s price action, which showed a considerable increase in volume. They will look at the result as a successful test of an earlier low price.
During the coming week the Federal Reserve will have a regularly scheduled rate setting committee meeting. Prior to Friday’s price decline it was generally expected to be a 50-basis point interest rate increase. This may happen, although the key for the market is not the rate but the issued statement. Some think the market move may scare the Fed into raising rates higher or lower and could also change the announcement related to cutting assets on the balance sheet.
Market analysts are focused on the price level of the S&P 500 (SPX), whose prior low point was in the low 3800 level. If it were to be breached, a “bear-market” would be called. Some believe the ultimate SPX decline could be in the 3000-3500 range,
Hopefully, what transpires doesn’t mirror Boeing’s launch of an essentially brand-new plane following their very successful 737. Early on, the new plane had some crashes.
July Numbers Difficult to Interpret
- Market sentiment was largely positive in the first half of June, then turned negative in the middle of the month.
- Interest rates on non-government paper rose as retail sales dropped.
- Government numbers focused on a middle of the month week and probably didn’t fully recognize the deterioration of conditions.
- If the very current sentiment continues, I expect the reports for June, published in mid-July, to show a further decline in sales and a gain in inflation.
- If the second quarter GDP is like the first quarter, it will be the second consecutive quarter of contraction, the definition of a recession.
- For the latest week, six of the ten commodity rail-carload groups showed declines: Other -15.4%, Metallic Ores and Metals -13.5%, Petroleum and Petroleum Products -7.6%, Farm Product and Food -5.6%, Forrest Products -2.9%, and Coal -2.0%. Total Intermodal -4.4% and Total Traffic -2.8%. (As these represent sales to customers, they denote current market activity not building inventory by the producers.)
- The level of interest rates in part deals with expectations. Thus, read what Randy Forsyth in the current Barron’s wrote. “If interest rate expectations are still too low and earnings forecasts too high, don’t be surprised if stocks get sliced further.”
Stagflation
- The World Bank is warning that the global economy may suffer 1970s style stagflation. According to them, it is possible world growth could be close to zero over the next 2 years.
- There is a view in many “advanced” countries that the will of principal taxpayers is to not follow their spendthrift governments by increasing their debt load in a slowing economy.
- According to some economists, the US suffered stagflation between 1973 and 1982. (I started Lipper Analytical in 1973)
- Frankly, I don’t fully remember the period as I was quite busy building the firm and growing the family, so I asked an associate to research which mutual fund peer groups did best and worst.
For the ten years ended in 1982 the top 5 peer groups in aggregate were:
Precious Metals +346.74%
Convertibles +220.51%
Small-Caps +214.81%
Equity Income +181.63%
Growth & Income +156.10%
Except for Growth & Income, these funds groups did not attract a lot of assets. The growth in assets was below $1 Billion in total, indicating the bulk of the industry produced good savings products, but not great investments as a group.
The five worst performing peer groups were also not popular with investors. Their 10-year performance is shown below:
Short US Government -10.22%
Natural Resources +23.37%
GNMA +56.11%
Financial Services +57.15%
Miscellaneous +64.43%
- To find individual fund groups that were extreme performers we looked at the two best and worst for each year. Not surprisingly there were only a few repeaters.
The most consistent winner were Precious Metals funds, at the top five times but also at the bottom three times. This seems appropriate in a period of rising inflation. Not surprisingly, Global Natural Resources finished at the top for two years. (During periods of high global inflation escaping out of fait currency makes sense. However, one needs to recognize that a greater fool theory game is at work, requiring quick sales to avoid losses.) We don’t have enough history and court cases to determine whether crypto related assets are better.
Where Are We Today
We have had a remarkably productive ten years in the market, but recently there has been great damage done to the ten-year performance records. (Unfortunately, my data does not include Friday’s painful numbers.) To over-correct in looking at the ten-year mutual fund performance record, I have eliminated peer groups gaining less than 10% per annum.
I found 17 peer group averages that produced compound growth rates from 10% to 16.96%. They are listed alphabetically below:
Capital Appreciation Global Real Estate
Consumer Goods Health/Biotech
Consumer Services India Region
Energy MLP Micro-Caps
Equity Income Mid-Caps
European S&P Index
Financial Services Science & Tech
Growth & Income Small-Cap
Global
I question whether many regional fund groups can continue better performance than selective global competitors for long periods. Past performance is a useful research screen but cannot be solely relied upon due to changing conditions.
One change due to both bank and market regulatory modifications is the level of trading desk liquidity. It is shrinking and depending on the size of the trading relationship, access is uncertain.
Another concern is the needs and desires of consumers conflicting with the political desire for jobs. Both European and US governments appear to prize job creation over consumer needs for the best products and prices. This trend aggravates supply shortages and causes unnecessary inflation
Unaddressed Trends Can be Problems
We have been told that demographics is destiny, yet we are not paying attention to the message it is sending. Liz Ann Sonders of Charles Schwab tweeted the following:
In 1952 the average global family had five children, now they have less than three. Following is the number of children per family in various countries: Niger 6.7, Nigeria 5.2, Senegal 4.5, Ghana 3.8, Pakistan 3.4, World 2.4, Mexico 2.1. The replacement rate in the US is 1.8 or lower and it’s 1.1 in South Korea (Within many people’s lifetime, India will have more people than the shrinking population of China.
These numbers have long-term military, economic, and investment implications. What can be done about these trends? One of the lessons from the US Marine Corps is to get the best possible troops on your side. Economically, the founders of Unicorns are the most productive people we have. (Unicorns are start-ups that become worth $1 billion or more.) The founders top 6 academic majors of these unicorn are in order:
Computer Science
Engineering
Business
Economics
Biology
Mathematics
Students who successfully take and complete these courses are used to precision and discipline. They learn at home or at an early age. We need more of these students to offset the eventual power of those growing societies.
Please Share Your Thoughts
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2022/06/mike-lippers-monday-morning-musings-how.html
https://mikelipper.blogspot.com/2022/05/bear-markets-recessions-not-inevitable.html
https://mikelipper.blogspot.com/2022/05/falling-confidence-beats-numbers-but-be.html
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A. Michael Lipper, CFA
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