Mike Lipper’s Monday Morning Musings
Trade, Invest, and/or Sell
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Every moment of our investment
lives we accept the choice and risk of investing in equities, or alternatively accept
the risk of not investing in equities. There are two valuable insights that may
be helpful in reaching your investment posture.
The first insight rests
on investment history. John Auters, a well-respected columnist now with
Bloomberg wrote this week “History is clear it’s very, very dangerous to get
out of stocks.” He was relying on data from Barclays using average annual returns
for each component: cash, bonds, and stocks, covering the 20, 10, 5, & 1-year
periods. The study showed stocks outperforming cash and bonds for each slice of
investment history. This was not surprising, stock investors expected it. What was surprising was the absence of a
single 20-year period of losing money. This should provide some comfort to the two
university investment committees on which I serve, as well as other long-term
non-profits and those who supervise inter-generational trusts. (Due to a more
strenuous history in the UK, a 23-year period will produce the same results as
the US.)
When thinking of
strategy, it would be prudent to remember the wise words of Jaime Dimon, the
20-year CEO of JP Morgan Chase, the most intensely managed global bank. He
said, “We know we are going to be wrong”. (The key is recognizing the mistake
and correct it.)
What about Bonds
We are on the verge
of generating US Treasury yields of 5%+, with high quality corporates already
at that level. Because of a hike in the Fed rate or some other driver, we may possibly
be dealing with 2 - 30-year treasury yields reaching 5% or higher. If that were
to happen it could harken back to the years when the retail market and some
institutions plowed money into the “magic fives”, which attracted cash and/or
redemption cash from funds, bank accounts, or the sale of equities.
With US Treasuries generally
accepted as the safest investment vehicle, there was a rush to own them. Since
1928 there have been 19 years where yields on US Treasuries were negative. Not
bad, 97 years with no defaults. (Mutual funds owning a portfolio of bonds continuously
buy treasuries, so they don’t have a fixed maturity or a date certain when the
holder will receive full payment of principal and interest, which the owner of
the actual individual bonds does). Thus, there is low risk to the owner of
bonds, which should be considered for a below equity return, with the odds
suggesting a positive return.
Potential Worry List
There is an overabundance of favorable news from largely left media-oriented sources, with little or any balance. There is a need to identify what could go wrong. Some suggest the radio operator of the Titanic was too busy sending out congratulatory messages to receive iceberg warnings on its maiden voyage. (Is the list of worries analogous to the iceberg messages not received by the ship’s senior officers?) History suggests we could be surprised by governmental activities until the end of 2024.
- The feedback communications loop is getting weaker. Print advertisements are dropping at both the New York Times and the Wall Street Journal. One day last week the eastern edition of the Journal was reduced to one section, rather than the usual multiple sections. Major ad agencies are reporting weak advertising revenues. Much of the decline is probably a function of less advertising by the big box department stores, except by those closing branches.
- The shopping habits of lower income customers are changing, with lower priced merchandise replacing higher priced brands.
- Industrial product prices rose +1.87% last week after a period of little movement. On a year-to-date basis industrial prices have risen 3.56%. (I wonder if the long-term inflation rate will settle in the 3-4% range rather than the 2% level stated by the New Zealand central bank.)
- Some manufacturers have noted some of their customers building a stash of their supplier’s products, delaying sales by the producer. (I don’t know if this is due to past supply-chain issues and/or the customer hedging against future inflated prices. The second occurs more frequently in countries where short-term interest rates are high or not available.
- Revenue dollars are reported, what is not reported is the number of transactions. In some cases when unit growth is meaningfully below revenue, prices have likely risen, which is not likely to be a frequent event. (As an analyst trying to predict the future growth rate, I would reduce the future revenue growth rate. It is much more difficult to project the impact of future profit margin improvements. It may be wise to use a 10-year average, excluding any double-digit year.)
- The developed world needs more productive workers. April job creation in the US was the second lowest going back to at least January 2022. The US birth rate has been below the replacement rate for some time.
- Stock markets participants are sending mixed messages. Of the 32 weekly stock price indices published by S&P Dow Jones, 28 rose and 4 fell, with 3 being overseas and one domestic.
- The AAII sample survey shows 40.8% bullish and 32.1% bearish for the next 6 months. The bulls are much more volatile, their reading three weeks ago was 23.8%. Over the same period the bears declined from 35.9%.
- Transactions in the markets were also split. 35% of the volume on the NYSE fell, while 45% on the NASDAQ declined.
- In terms of the leading fund performance by sector. Though Thursday the utility sector led with +4.53%. The worst performance was generated by Indian Region funds, with a return of -2.77%.
Unlike the captain and crew, I am aware of risks and have
a buying reserve and many holdings.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Secular Investment Religions - Weekly Blog # 835
Mike Lipper's Blog: Avoiding Many
Mistakes - Weekly Blog # 834
Mike Lipper's Blog: News &
Reactions - Weekly Blog # 833
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