Marketline Monthly – January 2020
The advent of coronavirus coinciding with earnings reports for the fourth quarter of 2019 created crosscurrents in January. The S&P 500 was flat; the Dow fell 1%. But over at the NASDAQ, technology stocks pushed the average up 2%. No question about it, most tech companies have posted strong results; even IBM managed to beat modest expectations. Among more ordinary companies such as Starbucks and Nike, reports that shops were closed in China and supply chains were disrupted means less future earnings growth, knocking their share prices. Even since the end of the month, the market has been gyrating between thinking about the potential slowdown in the wake of China’s shutdown, and being satisfied with earnings reports.
We are still expecting volatility as Election Day nears, but that is months off. Meanwhile we continue to search for value while at the same time selling off positions that look overvalued. Recently this latter bucket has included Wal-Mart, but we have also pared large positions in Apple, Microsoft and others, to mitigate the risk that these names pose when they become ever larger portions of portfolios. Surprisingly, we have been able to find a few names to buy, even in this ‘expensive’ market. Most recently, we have taken a small position again in Caterpillar Tractor. We sold CAT a couple of years ago, at a price fairly close to its current quote. With the bull market ever since then passing the stock by, we felt that its valuation is closing in on a bottom.
Our continental neighbors saw a bit of a lift. Canada and Mexico both posted positive returns in the 1.5% area. Meanwhile over in Europe, stocks posted a fairly steep decline, with the FTSE off 3.4%. The poor performance seeped into emerging markets as well. Emerging markets are uniquely commodity-oriented, and China’s ‘closed for business’ posture has made things very tough. Too, the US dollar keeps rising, slamming emerging markets countries which borrowed a lot in US dollars over the last several years and are facing repayments. We still believe in diversifying with a dollop of foreign stock exposure but only if those holdings make good sense from a valuation perspective.
The bond market is using any excuse to rally. This time around, it was lower commodity prices associated with slack demand from China. While no one is calling for a recession, certainly folks are concerned about how much of a hit the economy can take these days before we hear the “R” word again. The long Treasury bond closed at a yield of 2%, off substantially from the 2.39% of year-end. (Remember, falling interest rates mean bond prices have gone up.) On the shorter end of the curve, rates also plunged, with the one year bill falling from 1.57% to just 1.43%. Who needs the Fed to lower interest rates when you have a virus from China to do it for you?
Looking at the larger picture, it is notable that once again rates are nearing decadal lows while the economy is basically chugging along at a brisk pace. These ratcheting movements – flat moments or slight rises interrupted by steep declines, which resets the base to a lower level, then rinse and repeat – are the hallmark of this very long bull market in bonds. For those who wonder how long this can last, take the words of one pundit under advice: “The US is but one recession away from negative interest rates,” a sentiment I completely agree with. In fact, last year was a very good year for bond returns despite moribund yields, as the Barclays Government/Credit index returned 9.7%, proving that one can make money in even the most starved of markets.
Last month we advised you that we’ve been jettisoning municipal bonds from IRAs (a hair early as it turns out, but then one can always say that about a sale in a bull market). For reinvestment, we found a selection of corporate bonds with yields about a half to one percentage point better than the bonds we gave up. It is good news for us that corporations have increased their borrowing activity lately, as that boosts the supply of bonds to choose from.
During February, I am off to school – attending a one day conference on distressed debt investing. Do not fret, I am not about to buy every piece of junk that comes across my desk; I only want to be better prepared should something interesting present itself.
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. Index returns quoted are price only.