We have all seen pharmaceutical commercials on TV where a listing of common side effects may include diarrhea, nausea and drowsiness. In today's financial markets, central banks are expanding their balance sheets by trillions of dollars annually and new side effects are on the way. This week saw a new milestone in the world of negative interest rates, when Henkel and Sanofi became the first public companies to sell new Euro bonds for more than the buyers will get back.
Earlier this month, I was invited to make an appearance on CNBC's "The Closing Bell" to discuss the topic "Is this the end of a stock picker's market?" I enjoyed the lively debate with Ross Gerber and Evan Newmark. In case you missed it, click the video link below. Since one can only say so much in a 4 minute segment, I'd like to share some additional thoughts with our loyal Runnymede readers.
Many articles have been written about the shift from active to passive investing. The thesis is simple. The majority of active mutual fund managers underperform their index and also charge a higher fee. This is a double whammy for an investor's bottom line. Therefore, the solution seems simple: move your money into low cost index funds and that should lead to higher returns over the long term. Unfortunately, it's not that easy. Let's take a look at the potential pitfalls of passive investing.
The Japanese and European central banks have taken extraordinary measures to resuscitate their economies. Instead, they may be sending them further into a deflationary spiral. If you take a quick look at the major stock markets around the world, you will observe a clear pattern that is likely to surprise you. Zero/negative rates are highly correlated to poor stock market returns this year; while higher central bank rates correlate with high market returns. It is the economies that are in the worst shape that are having to test negative rates.
Runnymede made one of the earliest calls on the corporate earnings recession in February of 2015. S&P earnings have been flat out terrible for 5 of the last 6 quarters with double-digit declines. However last quarter, the S&P showed signs of turning the corner. Analysts had forecast 10% growth heading into the first quarter but companies still fell well short of that mark for essentially a flat quarter. As 2nd quarter earnings season kicks off, analysts are even more bullish with S&P reported earnings growth forecast at 15%. While we do not expect this number to be that great, if it can even show high single digit growth, it could very well prove to be a catalyst for stocks to hit new highs.
In 2007, Nassim Taleb published his best-selling book "The Black Swan: The Impact of the Highly Improbable." Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan events and are exposed to losses beyond those that are predicted by their defective financial models. This proved to be right on the mark as one year later, the financial system almost collapsed due to poor financial models that predicted real estate prices would go up forever.
In the travel industry, prevention of accidents is at the top of its agenda. Safety drills for airplane takeoffs and landings are routinely practiced. On ships, passengers are assembled for lifeboat drills as soon as they board the vessel. Every passenger’s name is called out and checked off; both the passengers and crew take the drill very seriously in view of the fact that just a few years ago the Italian ship Costa Concordia ran aground on the coast of Tuscany and toppled on its side. Ship captains and sailors are in constant touch with weather stations, downloading data into their computers for the most up-to-date weather forecast and analysis.
"It's déjà vu all over again." - Yogi Berra
The stock market has long been classified by economists as a leading indicator of the economy. It tracks and reflects the nation’s economy and industry fundamentals. The market often seems able to anticipate positive or negative change before it happens. Since the beginning of the bear market in August of 2015, the prices of many bank stocks, especially European and Japanese banks, have declined steadily and precipitously. Deutsche Bank has lead the way by dropping below the level it reached in 2009. Shares of HSBC, Citibank, Bank of America, Credit Suisse, Goldman Sachs as well many other big banks have also taken a beating of 25-45%.
In the financial markets, we have always had two important components: investors and regulators. Today, we are seeing governments as significant market participants that impact global markets. Sovereign wealth funds and public pension funds around the world are now among the largest owners of publicly traded stocks and bonds. China and Japan alone represent $5 trillion in public funds out of an estimated total $30 trillion of investments owned by 160 countries. No doubt these are investors of great size that can crowd out individual and institutional investors.
This week, I am inspired by Walt Disney World, a.k.a. "The Most Magical Place On Earth," where we spent Spring vacation for a family reunion with my wife's family and some friends. While waiting in lines and traveling to and from the park, I had time to reflect upon the success of Disney and how Walt Disney's philosophy can be applied to a successful investment strategy.
This weekend millions of people will gather around the United States and join together in the fight to end premature birth. The March for Babies is held yearly in over a thousand communities with the proceeds going to fund March of Dimes research to prevent premature births, birth defects and infant mortality.
This will be the 3rd year that my family participates in this wonderful event. Last year Runnymede was a top corporate fundraiser in Morris County and once again we are hoping to be a big contributor. If you would like to help with a donation, any amount would help the cause, even if only a dime.
Here are 3 reasons why I walk at the March for Babies: