Marketline Monthly – October 2019
In October, stocks managed good sized gains again. The Dow, held back by Boeing and a couple other components rose 0.5%, but the broader S&P 500 increased 2% and the NASDAQ beat them both with 3.7%. The primary drivers of these returns were fundamental and classic – earnings and interest rates. Earnings, while not fabulous, have been solidly above expectations for about three quarters of companies, with some genuine upward surprises in the mix. Meanwhile, the single most nerve wracking signal in the markets – the inverted yield curve – has corrected back to, if not normal, at least a lot closer to normal, thanks to a dawning of rationality at the Fed. The only inversion we see today is in the very shortest end of the market, though rates are extremely flat out to about five years (see Bonds below).
A sea change in the market is upon us. This shift began when Uber and Lyft issued stock to the public for the first time, known as an IPO (Initial Public Offering). These much hyped companies, with billions invested by venture capitalists, landed with a thud. Uber’s first trade was at about $42, below the expected price. It now trades at $28. Lyft traded above its expected price on the opening, at $87; it now trades at just over $42. Neither company has made a profit. A host of other new companies came to market with varying results, and then the Big Daddy of them all, WeWork, began to approach the stage. But investors balked at the $50 billion valuation that the company was seeking for the highly indebted, profitless leasing company. Instead, WeWork has ended up in the trash heap, its CEO ousted, having never reached IPO status. WeWork may in fact go bankrupt, buried in debt as it is.
The point of these stories is that the tenor of the market has changed from keen interest in ‘technology’, however it is defined and whether it makes a profit or not, to the more mundane. Mundane is where we live, owning companies that make pumps, sell seed, transport goods, run restaurants, and so forth. These are the end users of all the technology that’s been sold in the past two decades, and they are benefiting from its application nowadays, with expanding margins, better cash flow management, and higher sales. That, after all, is the point.
I am fresh off attending the CFA Fixed Income Conference in Boston, which sad to say did not live up to its price tag. However, there’s always a nugget or two to be found, if even as confirmation to something you’ve thought all along was true. The agenda included a couple of bullish cases for bonds even from these low levels. It has only taken ten years for bond “experts” to tentatively come around to the idea that bond rates might not go up much from here; this time lag is proof that humans are uniquely poor at identifying inflection points. The 2008/9 time frame, when the Fed was seen as pumping money into the system to save it, was widely viewed as inflationary. Instead, it was a continuation of the long bull market in bonds that began in the 1980s.
Two factors are likely influencing bond rates in the modern era: aging demographics and expanded production of goods all over the world. Aging creates a quest for income, which we see every day as pension funds scrap for every basis point, driving yields down and bond prices up. Aging also reduces consumption of many items. Meanwhile, globalization has brought productive capacity to countries that for most of the 1900s had scant industry. Did you know that Vietnam is making its own car brand now, albeit somewhat badge engineered? With the world awash in plants willing to make things, it’s tough to see inflation on the horizon.
Meanwhile, the Fed realized its mistake of 2018’s fourth quarter in the nick of time, and cut rates, fixing the inverted yield curve. Inversions are evidence of the Fed making a mistake. It’s no wonder our economy slowed– too-high rates at the end of 2018 finally bit the economy by the time the late summer rolled around. Lower rates, too, will work with a lag; we may be looking at a better economy just a few months from now.
We have decided to permanently fold the international stock section into just Stocks, starting next month. International investing is not a keen focus for us, though we almost always have 10% or so of portfolios devoted in this direction. Our holdings tend to be Canadian and European however, so it makes no sense for us to be covering Brazil every month. Furthermore, we’re adamant that this market comment stay on one page!
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.