Marketline Monthly – January 2019
After a rough end to 2018, stocks took clues from good earnings reports and a dovish Fed in January, surging over 7% on the Dow and 8.4% on the S&P. The Nasdaq, benefiting from greater volatility which hypes its responses to market moves, rose 9.7% – but remember it fell by a similar amount in December.
While stocks dished out a partial recovery from last month’s shellacking, we have in front of us a number of events that should provoke some caution. Trade talks and Brexit are two that come to mind. Though it seems that US companies are adjusting to a higher-tariffed world, tariffs are set to increase again without a good outcome from recent talks. We don’t think the psychology around this would be good. The timing of the talks, too, is problematic. Results will fall into that no-man’s land before the next corporate earnings reports are due, when bad news can be magnified simply by being the only news to react to. Brexit, while not a US phenomenon, will likely have an impact as well. It appears that the UK is headed for a messy exit from its European partners, which no one could quite believe would happen. As a result, there is little time to prepare, and we think that just as the Brexit vote caused US stocks to shed several hundred Dow points, a crash out of the EU will be disruptive enough to affect sentiment here, at least temporarily. But with the Fed feeling benevolent, downturns might be buying opportunities. Keep a wary ear tuned to Powell, though. The Fed’s actions matter.
Last month we wrote: “Bonds have given a clear signal that the next trend in long yields is down, not up…” Sure enough, except for the long bond, yields sank across the curve. The long bond dropped just a basis point. But that ignores the fact that for some days during the month, the 30 year traded with a yield starting with a “2”, rather than a “3”. Furthermore, we’re getting some help from overseas, as the European Central Bank, reacting to a significant slowdown in Germany and France, is making easing noises. Already, our bond yields are (and have been for some time) high relative to those in many other developed countries. For many reasons, we deserve higher yields, but at least if Eurozone rates fall, ours stand a chance of following along. That said, it would not be unusual to see a foray back up to something like 3.15%, which we would view as a buying opportunity.
Among sectors, municipals are once again attractive, as supply and demand metrics promise a lot of maturities and calls this year which we don’t think will be matched by new issuance. With many bonds sporting rates in the 3.2% to 3.7% area for medium and longer term issues, taxable bonds can’t compare. Too, disappearing deductions make the muni market one of the last bastions of tax savings.
Overseas results were disparate last month. Canada, tied to energy and the US, rebounded nearly 9%, in line with US stocks; but Mexico, undergoing shifting policies with the new administration, rose only 5.8%. However, it’s fair to point out that Mexico was really only flat in December, missing the downturn. Europe, as mentioned above, is decaying again into lower growth mode. The return on the Financial Times Europe index was only 3.6%, pretty miserly. Protests in France, a dramatic slowdown and a leadership change in Germany, Italy’s defiant tone… these factors promise volatility for 2019.
The Hang Seng, Hong Kong’s market, surged in the 8% range. However, do not make much of that, as for the year, this market was down nearly every month, reflecting a slowdown in China. Japan managed a 3.8% rise, but also had a negative year. For context, the Nikkei is up substantially over the last five years as the economy slowly heals from multiple structural issues.
Brazil deserves special mention, having surged 10.8% in January. Its trailing one-year return is well into the teens in native currency, which looks less good when translated to dollars. Still, a new administration here is trying to unlock Brazil’s potential, contributing to optimism. We suspect that will be dialed back in the wake of the breach of a mining dam, the consequences of which are being blamed on hasty deregulation that ignored environmental and social concerns. Look for extreme volatility in Brazil in 2019, in keeping with other emerging markets.
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.