I just read an interview with retired fund manager Bob Rodriguez who managed award winning FPA mutual funds in stocks and bonds. Like us, Rodriguez believes in owning cash when there is a storm on the horizon and he held significant amounts of cash (30-40%) in 2000 and 2008 in his actively managed stock mutual fund. He is now retired but he is seeing a perfect storm developing thanks to the huge shift into passive management where there are NO cash holdings. When the next downturn hits, many of those invested strictly in passive instruments will likely be hit extremely hard and their timing will be poor to hit the sell button. Here are his insights on the coming storm:
The first half of the year has come and gone. The S&P 500 ground its way higher and finished the first half up 9.3%. Unsurprisingly it has been robust S&P earnings that drove the markets to new all-time highs. Reported earnings were up 18% year over year. Despite the new administration's failure to pass new tax policy so far, analysts weren't expecting much movement in 2017 so earnings estimates haven't disappointed in the least. In fact, companies have continued to beat expectations on the top and bottom line and we expect more of the same in the second half. This has the Runnymede investment team optimistic heading into the second half of the year. As the market continues to hit new highs, there seems to be a guru warning of the next crash on a weekly basis. Just ignore the noise for now.
I recently went to see a local production of "The Emperor's New Clothes" which is based off a short story by Hans Christian Anderson where two weavers promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid or incompetent. When the emperor parades before his subjects in his new clothes, no one dares to say that they don't see anything for fear that they will be seen as unfit or stupid. Finally a child cries out, "But he isn't wearing anything at all!" and the weavers are exposed for the frauds that they are. Sadly this happens in real life and market gurus who get airtime on popular financial TV programs are there for entertainment, not for actual substance. Make sure that you know the difference.
I usually reserve Friday blog posts for lighter topics but with the FOMC meeting this week, I think it is important to touch on the Fed's plan to shrink its $4.5 trillion balance sheet. While the announcement was widely expected, it spelled out in greater detail plans to slowly unwind the Fed's sizable bond holdings. We believe that this step is very positive alongside interest rate hikes. The economy is doing well enough that the Fed can step back from its emergency measures, thus saving ammo for the next recession. We do not believe that this will cause a spike in long term rates but will monitor the situation closely.
During a bull market, it seem like every single year a chart will start circulating comparing the current price action to a terrible period like 2008, 1987 or even 1929. Well today is that time again. Yogi Berra said it best: "It's like déjà vu all over again." Here is the chart that is making its rounds on Wall Street.
Recently one of our clients sent me over an article from Yahoo Finance titled Mark Yusko: 'The US is going to have a crash and it will be massive.' Clearly that is a great title for an article because it is scary as hell. Just keep in mind in today's world, you have to say something like that to get quoted. Writers know that is great click bait. They salivate over quotes like that one from Yusko. But more importantly to me and you, is this really going to happen? Is the market going to crash? Perhaps eventually, but not likely in the near term. Is it going to be massive? Almost impossible to answer. Our view is that the market is still heading higher. S&P earnings are growing in the low teens and the global economy is on the upswing. Interest rates remain extremely low and are still near zero in Japan and Europe. These conditions don't suggest an imminent crash but we are always monitoring variables that could change our outlook.
Last fall, the US Dollar rose after the election and many pundits worried about the effect of the rising dollar on corporate earnings from abroad. Treasury Secretary Mnuchin advocates a strong dollar over the long term which is a policy that has been in place for more than two decades. Here are his thoughts:
Yesterday on Bloomberg, Barry Ritholtz posed the question "The Trump news flow is overwhelming. What should we do?
Last Wednesday, Convergex's Chief Strategist Nick Colas pondered on this question, "What would US stocks do if President Trump resigned?"
Whenever markets reach new highs, it is inevitable that people begin to ponder if this is a top or even worse, a bubble. This led the WSJ to ask famed investor Jeremy Grantham point blank, "Is the US market in a bubble or is it different this time?" His response is certainly worth a few minutes of your time.
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