The media is focused on Hurricane Florence and its path toward the Carolinas and Virginia. Being a category 4 hurricane with 130 mph sustained winds, over a million residents are subject to mandatory evacuation due to risk of life-threatening storm surge, dangerous winds, and flooding. Our government is warning residents to take protective measures. This week also marks the 10th anniversary of the Lehman Brothers collapse; yet in the financial industry, investors are often told to stay the course and ride out the storm. Can you suffer through another bear market like 2000 or 2008 when the S&P 500 fell over 50%?
Last Friday, August 31st, Runnymede managing partner Andy Wang returned to The Reuters Building in Times Square to chat with news anchor Fred Katayama. In this segment, Fred asks Andy about a variety of subjects including trade talks, emerging markets, and why Runnymede likes service sector companies.
Yes I am swept up in the hype of the release of the movie "Crazy Rich Asians." As an Asian-American, I am hyped to finally see a major motion picture with an all Asian cast which we haven't seen since 1993's Joy Luck Club. Please go out and support the film! But today's blog post isn't about the film, but about S&P earnings season which I'm calling crazy rich earnings. We have been bullish on the market because of the extremely strong earnings coming out of corporate America. While others have been warning about valuations (for years), remember that no bear market was caused by solely by over-valuation. How good has earnings season been? Let's take a look.
Sometimes it is fun to look back and see who made the correct call on the markets. High profile investors make bold calls but are seldom held accountable for the bad ones. Yet, the media will go back to the "big" names year after year because they generate clicks for their ad dollars. Unfortunately this doesn't bode well for your investment portfolio if you take their newsworthy headlines as actual investment advice. Let's take a look back two years to the summer of 2016 when two of the most prominent investors Bill Gross and Jeffrey Gundlach were screaming SELL!
Today President Donald Trump has indicated that he is willing to slap tariffs on every Chinese good imported to the U.S. should the need arise. This is a shocking comment but likely only rhetoric. The stock market shrugged it off and the S&P 500 is flat on the day.
Michael Batnick wrote an article on The Irrelevant Investor blog entitled, "Should I Time the Market?" In it, he responded thoughtfully to a 30-something investor who posed a question about timing the market. Given where valuations are, and that he has many decades ahead of him, would it make sense to wait for a better pitch over the next five years? This is an excellent question that I think deserves further discussion.
Heading into 2018, I listened to many strategy calls from the leading Wall Street players and the consensus view was pounding the table on international stocks over US stocks. Their call was in favor of international because of cheaper valuations and long-term under-performance. This didn't sit well with me. Sure valuation is cheaper but there is a reason for it. The European economy has been recovering from significant issues with a deep Greek recession, the surprise Brexit, and Deutsche Bank whose stock is trading below its crisis 2009 low. Just this week, the ECB cut their growth forecasts and announced they will keep rates at record lows for at least another year.
After the historic low volatility seen in 2017, the first four months of 2018 have felt especially turbulent even though the market has largely moved sideways. The 24 hour news cycle has been louder and gives negative news more amplification. Worries this year have focused on the potential of trade war with China, rising inflation and interest rate hikes. While these are certainly legitimate concerns, we suggest to our clients and readers that you often need to turn off the news and simply focus on the fundamentals. The good news is that fundamentals from US corporations are still improving and point to a bull market that should continue to grind higher for the rest of the year.
The constituents of the S&P 500 are wrapping up an extremely strong 4th quarter earnings season. Even before tax reform kicks in, corporations reached record operating profit margins at 10.4%. Furthermore, companies beat on the top and bottom line with over 75% beating estimates which is an eight-year high. Looking ahead, it is no surprise that earnings revisions are trending higher across all sectors.
Yesterday President Trump surprised many of his own advisors when he announced that he would impose steel tariffs of 25% and aluminum tariffs of 10% on national security grounds. There are rumors that his top economic advisor Gary Cohn is so unhappy with the decision that he is on the brink of leaving the White House. The market voted a thumbs down on the decision as the Dow fell close to 1000 points before closing some of the gap on Friday. While the tariffs aren't yet finalized, many of our trading partners from Canada to Germany are seeking exemptions so it isn't yet clear how this will play out. If it is a broad based tariff, it would likely cause ripple effects in global trade and the end result is higher inflation.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede. Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.