Marketline Monthly – June 2019
Impersonating an amusement park ride, stocks surged in June after a steep decline in May. The Dow was up 7.2%, a number that in the ‘old days’ would have been considered a pretty good year. The S&P tacked on 6.9%, and the NASDAQ, displaying the power of its technology exposure, rose 7.4%. The risk repricing of last month was reconsidered as the Fed made dovish sounds and interest rates continued on a declining path. This past year has been a perfect illustration of the value of staying put with one’s investments – reacting to the steep decline of the fourth quarter by selling would have excluded you from the returns of the first months of this year, and reacting to May would have made you miss June.
Quarterly earnings are upon us, with Delta, CitiGroup and a host of smaller banks due to report shortly. Disappointment is probably in the cards thanks to a slightly slowing economy in the first half of the year, though using resulting declines to add to positions will be profitable in the long run. In fact, just as market timing has been treacherous this year, every dip has thus far proved buyable, with the nadir of the fourth quarter being the Granddaddy of those dips.
Bond yields continued a downward trajectory last month and in fact, the curve steepened. The one year declined from 2.2% to 1.92%, and the five year dropped from 1.91% to 1.77%. Out the curve in thirty years, the yield only declined 0.04%, leaving that bond at 2.53%. While this is still a far cry from 3% at the start of 2019, it’s clear that momentum is slowing a bit. We expect a minor move up in long rates, so it might pay to wait to load up on bonds to see if better rates are forthcoming.
While our rates are low, we don’t hold a candle to Europe and Japan. Germany’s long bond yields 0.24%. Think of trying to fund your retirement on that. Over in Japan, things are a tad better at 0.34%. Thirty year UK gilts yield a whopping 1.36%. Even Greece isn’t much better at 3%. Of course all of this is slightly better than having to pay the government to take your money, which is what investors in shorter bonds all over Europe are doing. This phenomenon is called ‘negative interest’.
Aside from the various factors pressuring interest rates that we have discussed here over the years, it’s apparent that demand for bonds is simply strong, all over the world. Banks hold more bonds, citizens hold more bonds, and governments hold more bonds than ten years ago. In fact, despite the stock market’s reasonably good returns of the last few years, inflows to bond funds continue to be positive while stock funds are losing cash. (This is one reason we think stocks have more room to run – investors are just too bearish to mark a top.)
Overseas markets were decidedly mixed last month. In Mexico, where interest rates remain high, stocks rose just 1.0%; but Brazil, another high rate country, managed a return over 4%. In Canada, stocks managed 2%, while Europe rose 3.7%. Enthusiasm over trade negotiations helped boost stocks there. Over in Asia, the Nikkei rose 3.3%, but the Hang Seng – a reasonable proxy for China’s health – surged 6%. Again, these results marked better sentiment around trade.
A few issues in Europe and the UK stand to influence markets in the near future. Italy’s budget remains nearly intractable, Merkel is on her way out in Germany, and Greece just ousted its liberal party in favor of conservatives promising to grow the economy. These political crosscurrents will likely influence sentiment this year and next. Too, Brexit is still on deck, with an October deadline now.
Meanwhile, while we rarely discuss Turkey, it’s worth a mention because it is a leading emerging market with significant influence on the world stage. Erdogan’s political party, facing political pressure from unhappy citizens, lost an important election. His reaction has been to can the head of the Turkish central bank, an outcome that has generated extreme concern among investors. Very likely, in the next few years, we will see developed countries withdraw capital from Turkey; whether this vacuum is filled by other players such as China remains to be seen.
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.