Marketline Monthly – August 2019
The market gave back July’s gains, ending with the Dow and the S&P off around 1.7%, and the NASDAQ sinking 2.6%. Trade issues came to the fore, but among earnings reports, a number of companies issued soft guidance for the future, for all sorts of reasons, which also depressed investors. Very likely, the reason the market didn’t sink more is that values are supported by even lower interest rates recently (see Bonds, below).
Last month we indicated that stocks haven’t done much in the last 18 months. This month, we decided to take a longer term look – we ran returns from July 1999 through July 2019. The S&P 500’s price return was just 3.9% per year during that time, and if you didn’t spend your dividends, you managed 5.9%. Back then, interest rates along the yield curve were 5% and 6%+ per year; had you simply bought a long bond, you would have performed as well or better than the major US stock market index. You can argue that this period was cherry picked, since 1999 marked a top in the market for years. But there are a fair number of so-so returns over decades in history; from 1965 through 1974 the entire return on stocks was about 17%, or 1.6% per year. This exercise points up one major risk of investing in stocks: your long term return will be heavily influenced by when you start investing, which is something you often cannot control. But this exercise also points up the value of owning bonds, at least for the last few decades. Bonds have been very strong performers at low levels of risk for a long time now. At this point, the dividend yield on the S&P 500 is higher than the yield on the ten year bond, and even the thirty year bond. This relationship is pretty unusual in modern times, but not so unusual if we look back in history, when stocks were considered very risky, warranting a hefty income payment to entice investment. Perhaps we are going back to past relationships.
If you think it’s weird that interest rates are so low, you’re not alone. August brought an unprecedented move down in yields – the US has never seen long term rates at these levels in its history. The long bond has closed below 2% – a far cry from the 3% of January first this year. Could we be headed to negative rates just like Europe and Japan? It’s possible. There isn’t any particular reason that our bonds should sell for higher rates than other sovereign governments in the developed world, except perhaps that our economy grows faster. Is that worth as much of a spread as exists? Probably not, in this climate.
For investors who are looking to buy bonds, the only good news is that everyone and his brother is taking advantage of these low rates, so new bonds are coming to market daily – and lots of them. If you are still in cash waiting to invest your bond portfolio, the first place I would look is high grade corporate bonds, and then maybe municipals. You might eke out an extra partial percentage if you utilize government agency bonds, but you’ll very likely have to put up with an inconvenient call option on the bond – meaning you could lose it before maturity, which is not good in an environment of ever lower rates.
Overseas markets ranged from down over 7% in Brazil where the Amazon is burning and the economy is slowing; to up marginally in Canada and a positive 4% in Mexico! Mexico may benefit significantly from companies relocating away from China.
Europe was off 5% last month, a depressing return for sure. Germany is contracting, Italy is in disarray, and let’s not even get started on the UK. Brexit looks like it will be a crisis about to happen, forever.
Last month, we wrote: Just for kicks, we’ll pose a question here, with the answer to come in next month’s issue: Given the strong growth in China over the last decade, what do you think the Shanghai stock index has returned during that time? The answer to this question is 11.1% for the entire period, native currency. That amounts to about 1% per year on a compounded basis – a whole lot of going nowhere. Why did we ask this question? To point up the difference between a fast growing economy and a good stock market. Most particularly in this case, the two are not necessarily correlated.
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.