Runnymede has been bullish on the stock market since early July because of improving earnings and good value relative to fixed income. As we ahead to 2017, we remain positive. Former JP Morgan Chief Equity Strategist Tom Lee shares our enthusiasm for equities in a recent interview on CNBC.
As we move past Election Day, financial markets should be able to refocus on what truly matters: company fundamentals. This should serve as a catalyst to push equity prices higher with earnings finally back on the rise. It has been a tough period for earnings because of the strength in the US Dollar and extreme volatility in crude oil prices. This trend appears to have finally stabilized. The energy sector is expected to post a flat quarter after posting huge losses for the previous four quarters.
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.
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.
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.
Many media pundits like to skew numbers to fit their narrative and a lot of people out there believe the Wall Street storytelling that "earnings excluding energy are fine" and "sales excluding currency are growing."
Well we disagree. It's too bad that in the real world, many energy companies are nearing bankruptcy and multinational corporations have to deal with currency fluctuations. Therefore, investors can't simply ignore all the bad news and go about life hunky dory. The ugly truth is that S&P reported earnings have declined for 5 consecutive quarters and are in a full blown earnings recession.
Last August, Runnymede Capital warned our readers that a financial hurricane was coming. Over the past six months, the stock markets around the world tumbled and the US has followed suit in 2016. Our clients, who gave us permission to raise cash reserves, were fortunate and their assets were protected.
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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.), 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 Capital Management, Inc. 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 Capital Management, Inc. 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 Runnymede Capital Management, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.