Marketline Monthly – April 2019
April was a storming good month! The Dow rose 2.6%, the S&P pulled off a rise of 3.9%, and the Nasdaq, reflecting strong interest in tech stocks, was up 4.7%. April’s market was a little narrower than we’ve seen, with performance focused in tech, but still, most stocks were up.
This bull market remains the ‘most hated’ bull market we’ve ever been involved with. Investors are piling money into cash and bonds. They are hedging stock returns. They are buying alternatives – private equity and real estate – anything but a stock! They disparage the market at the first downturn. We’ve heard ‘house of cards’, ‘overvalued’, ‘bubble’, and other insults hurled at this market. Looking at the forest rather than the trees, the objective evidence around the market is:
- The economy is growing. Though stock returns aren’t very correlated with the economy, it doesn’t hurt to have a benign backdrop.
- The price/earnings ratio of the S&P 500 is barely above the long term average of 16, standing at about 17 as we write this.
- Dividends on the S&P are growing at a rate of just shy of 10%. This is an unsung part of return.
- Long term interest rates are low and have stayed low for a very very long time. This is the most important factor in this list.
As long as investors detest the market and refuse to put cash to work or reallocate from bonds, there is money out there that can flow into stocks. Over decades of watching bull and bear markets, we can say that bull markets do not end when they are hated.
The long bond closed the month at 2.93%, sapping profits from a decent move from 3% to 2.8% during March. Still, we’re expecting to see a lower “upper boundary” for the long bond yield this year, at least.
In the shorter end of the yield curve, the inversion remains. This inversion might be a product of the Fed’s very large balance sheet, which is now running off as bonds mature. That produces a tightening effect unless the Fed counteracts it, which it hasn’t done – in fact until recently the Fed was doing the opposite, hiking rates in addition to allowing its balance sheet to run off. Perhaps the next shoe to drop will indeed be a cut in rates.
Could the low long bond rate be ‘saying’ that we are headed for slower growth in the future and thus, the Fed will cut rates soon, or is the long bond simply experiencing strong demand from retiring baby boomers and pension funds, driving down the yield? Evidence shows that bond funds are pulling in money, sometimes at the expense of stocks lately, so the demand is certainly there. Note that all of this is happening in the face of record budget deficits. Deficits were always thought to drive interest rates up, but instead, are very apparently driving interest rates down instead. With this as our background, we have heightened interest in well – rated corporate bonds, especially in intermediate maturities. Our posture towards municipals has shifted, to holding off until we can once again see a 3% yield to call date, and something in excess of 3% to maturity. This market has run pretty far recently; it’s time to be judicious.
Overseas markets put in a good show last month. All the markets we follow had positive returns. The best among them was the Nikkei, at 5%. Canada and Mexico tied at 3% for second place. Over in Europe, where growth is a daily struggle, the FTSE rose 1.9%.
The Hang Seng is somewhat reflective of China’s fortunes. It rose 2.2% last month, as China’s recent stimulus seems to be taking hold. Finally, the worst market was Brazil, at 1.0%, but given spots of turmoil in this country’s politics and economy lately, that wasn’t bad.
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.