Mike Lipper’s Monday Morning Musings
Sentiment Appears to be Changing
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Where are We?
In theory, securities markets discount “the future”. We are comfortable believing we “know” where we are going, which is a useful charade because we really don’t know, partially because we don’t know where we currently are. We are bombarded with up to the nanosecond prices, which only tell us about transactions occurring for unknown or appreciated reasons. Far too many investors give convenient reasons for price moves without looking at the underlying data. For example:
- In this past four-day week, down day share volume was higher than up-day share volume. There are three possible reasons for this:
1. With light overall volume, normal liquidations counted for more.
2. Lower prices brought “buy the dip” traders in.
3. Possible recognition the next 12 months wont produce from the bottom type gains.
- The industrial price index tracked each week declined a bit, suggesting the intensity of the inflationary drive is lessening.
- Performance leadership was too diverse. For June, the 3 best mutual fund peer groups were Natural Resources +13.5%, Latin America +12.4%, and Real Estate +11.3%. (We can discuss off-line with subscribers.)
There was however a performance change that generated a lot of comments by pundits, as well as a few calls to me seeking an explanation for the good June Large-Cap Growth Funds performance of+5.63%, way above the Small-Cap Growth Funds return of +3.68% and the Large-Cap Value Fund return of -0.99%. Large-Cap Value funds beat Large-Cap Growth Funds in the first quarter with returns of +11.05% and +1.57%, respectively.
On average, stocks in “value” funds have materially lower price/earnings ratios than “growth” funds. The justification for the higher growth fund p/e is that they produce higher earnings. However, they also appear to be more predictable, allowing investors to believe they can extrapolate those earnings for a longer time. Many “value” funds have significant cyclical characteristics and economic cycles are typically of shorter duration than the perceived length of growth. Thus, one interpretation of the switch back to growth leadership is the cyclical peaking of economics favoring value in the second quarter, which will probably contract in future periods.
Outlooks
Remembering my absolute right to be wrong, I searched for clues to the unknown future in 3 buckets: economic data, structure of the American securities markets, and policy pronouncements. From my standpoint it is not important you believe these views and perhaps act on them, but it is important you are aware of them in forming your own views. There is some chance I may be correct, at least in part.
Economic Data Points
Most of the US and much of the Developed World are emerging from the “lockdown” phase with the realization that aggregate financial wealth has grown through the price appreciation of homes and marketable securities. (It is too early to know the size of the expected loses and hopefully lessons learned by new investors.) What is known from recent government statistics is housing costs have risen to over 30% as a percentage of income. Some of the increase is perhaps offset by a temporary reduction in commuting and office clothing costs. In the past, housing and commuting costs were expected to be below 25% of income. The diverted income probably came from the portion not going into investments, which was intended to be used for debt repayment, retirement, and schooling costs. Because of the appreciation in the cost to buy a home, renting has become more popular. The problem is that there is no opportunity for capital growth, so there’s a good chance that investing for retirement will lessen and the age of retirement will lengthen.
Much is being written about the inevitable risk of rising inflation. Although most of the focus is a future number, the danger from rising inflation is how it will influence the spending habits of individuals. In looking at major future expenditures, people will either accelerate purchases to avoid future price rises, delay purchases until prices drop, or wont purchase the products or services. All choices will be somewhat negative for long-term economic growth. The key to inflation expectations are whether they extrapolate present levels or anticipate a material change in the rate of inflation. Recent surveys of inflation expectations broken down by the age of the predictor are insightful.
Inflation Expectations
Age Group Expectation Contribution to Economy
Under 40 3.2% Net Spenders
40-60 4.0% Net Savers
60+ 4.6% De accumulators
If there are not habit changes and the absence of negative changes, these projections could be low. (In the past, savings did not accelerate unless savers received at least 2% above inflation, or a minimum of 4%. The gates my not open widely below 5%.)
Market Structure
While the US’s share of global GDP is 16%, our share of global market capital is 44%. While there is some logic that US GDP will grow in absolute terms, its share of market capital is likely to decline. One reason is that we have made being a public company unattractive. The 2000 largest public companies listed by Russell shows 499 being growth stocks and 842 being value stocks. MSCI can only find 434 European companies to track and 1547 companies in the Asia Pacific. To provide the necessary retirement income, US and European investors must invest beyond their borders and probably beyond their governments.
Even during a week where growth outshone value, investors in NASDAQ stocks were far less bullish than those on the New York Stock Exchange, measured by the ratio of new highs to new lows:
New Highs vs New Lows
NYSE 380 vs 90
NASDAQ 287 vs 220
Policies
Almost always it is risky to take politicians’ words at face value, they show what the public wants to hear but not their real intent. With the current administration we have some pretty good clues as to their model. One unmistakable clue is the return of the Franklin Delano Roosevelt bust to the oval office. The stated goals of the current tenant are close to a carbon copy of FDR’s second term, which needed WWII to bail the country out from its socialist policies.
I can email the “Executive Order on Promoting Competition in the American Economy” (29 pages, plus 48 pages of a fact sheet) if anyone cares to see it. One should understand that these documents are written by lawyers with little or no business and/or investment experience.
Working Conclusion
We have entered a new phase that is unlikely to benefit from the strong tail winds that peaked in the second quarter. For those that are prudent, there are signs of potential stock and economic trouble ahead. As with the study of what causes wars, there are both underlying and immediate causes. In terms of the battle for investment survival, there are cracks in the foundation of the investment structure. (This is not an intended reference to the collapsed 40-year-old condo.) There is not yet a visible immediate cause for a meaningful decline. (Assassination of the Crown Prince, the immediate cause for troop movement in World War I.) Consequently, prudent investors should adopt a trading approach for their short-term oriented funds and be prepared to increase their long-term positions at lower prices.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2021/07/independence-day-3-investor-lenses.html
https://mikelipper.blogspot.com/2021/06/what-did-fridays-market-political.html
https://mikelipper.blogspot.com/2021/06/mike-lippers-monday-morning-musings-50.html
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