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.
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 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.
Thanks to the Fed's zero interest rate policy (ZIRP), baby boomers are facing a much tougher road to retirement than those in the past. While it may seem like an eternity, it was only 10 years ago when you could park your money in a savings account and earn interest of 5%. Retirees who worked hard and saved their money could safely invest their assets in retirement and not have to worry about suffering any losses.Today is an especially challenging environment for investors who are looking to generate a safe income stream. No Treasury bond will pay a safe 5% return as a 30-year Treasury Bond yields just 2.69%. This is causing a massive gap between what boomers say they want in retirement and what they're doing to make it happen.
Bubbles are the only things that matter. The rest of it is boring. You show up for work, markets are at normal levels, and there's not much you can do. It's all trivial. But in a great bubble you can get your clients' arses out of the way, and the money you can save can be quite legendary." - Jeremy Grantham
The financial services industry generally frowns upon market prognosticators. "Stay the course," they say. This is especially true in recent years since passive investments have outperformed active ones. Admittedly, peering into one's financial crystal ball and voicing an opinion can be a risky endeavor. Besides the obvious risk of being wrong, another risk is being labeled a perma-bull or perma-bear. In article after article that I read, the media loves to turn to its favorite go-to bulls and go-to bears for an appropriate quote. Unfortunately, few individuals are permitted to change their minds and even fewer do it well.
At Runnymede, we do a lot of research, and our view is dynamic, not fixed. Ultimately, our market outlook is reflected in the positioning of our clients' portfolios.
'Tis the season. Yesterday, I read this WSJ article Consumer Keeping Growth Afloat. It's not surprising at this time of year where the lion share of retailers' fortunes are made that we are reminded that 70% of spending in the USA is consumer-based. Yet, we also read about a manufacturing slump. This got me to thinking about Santa and the Elves.
Two months ago, I wrote that the S&P earnings will suffer its first annual decline since 2008. The silver lining was that 2016 estimates still looked ok. However with the new year now drawing near, even those estimates are falling. For the first time, 1st quarter estimates are showing a year-over-year decline. Furthermore earnings for both 2015 and 2016 continue to contract.
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.), 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.