Tuesday, July 11, 2017

Fake News - Not Practiced Here.

I am a great admirer of Peter Lynch, the famous mutual fund investor. He has written several books on investing in the stock market, but the one that made the most impression on me pointed out that often times investment ideas, concepts, and/or economic realities seen every day are overlooked or ignored. I have found that to be true over and over again. So many people are influenced by the news (or so-called “fake news”) and pay no attention to the contradictory evidence around them. The economic aspects of the world are played out on the streets and within shops and construction companies, and should not be ignored.

I recently had the pleasure of visiting London, Paris and Edinburgh and have some thoughts I would like to share with you. So much can be learned about the world’s economic status by visiting some of the greatest cities in the world. I will share those reflections with you as well as my observations regarding economic reality in those countries.

I also want to bring you up to date on the unbelievably good economic reality we are experiencing here in the United States. All of the economic tea leaves are pointing in a positive direction. Of course, there are significant geopolitical events, but you cannot invest around “what might be”. You must invest based upon what you are looking at currently. It is important that you can differentiate between the fake news as reported on many internet services and national broadcasts, and the real economic evidence that is all around us.

First, I need to report on the month of June, which was basically a flat month. However, the overall six-month period ended June 30, 2017 was quite impressive. We have enjoyed a massive move up in the financial markets since the election of the new President, and all of the major market indexes were very favorable over this time period.

The Standard and Poor’s Index of 500 stocks was up 0.6% for the month of June and has enjoyed a 9.3% year-to-date performance and a one-year performance of 17.9%. Interestingly, the index was the lowest performing index over the major ones for the one-year period then ended. The Dow Jones industrial average was up 1.7% for the month of June and is up 9.3% for the year-to-date in 2017. It has also enjoyed a quite handsome 22.1% increase for the one-year period ended June 30th. The NASDAQ Composite was actually down for the month of June 0.9% but it is the best performing index up 14.7% year-to-date in 2017 and up 28.3% for the one-year period then ended. The top performer in the month of June was the small-cap Russell 2000 which was up 3.5% for the month of June, but has had a disappointing year in 2017 up only 5% for the year but up a very handsome 24.6% for the one-year period ended June 30th. The Barclays aggregate bond index was negative for the month of June, up 2.2% for the year-to-date, but negative for the one-year period ended June 30th, a 0.6% loss.




Economic news has turned out to be very good in 2017. On Friday, they announced the June employment numbers and they were quite extraordinary. Nonfarm payroll had expanded by 222,000 in the month of June and the jobless rate was fixed at 4.4%. As we have mentioned often times in these postings, unemployment of 5% or lower would by all standards define full employment. There is also much going on in the interest rate cycle that is affecting fixed income investors. The Federal Reserve has recently expressed their concern about a stock market that continues to go higher and has reflected that they would like to increase interest rates dramatically as the year goes on. Of course, they counter that with the opinion that if inflation does not increase and the job market stays reasonable that interest rate increases could be delayed longer than this year. It is very clear to me that the Federal Reserve has a high desire to increase interest rates and is likely to do so by the end of this year as well as a couple of times during 2018. However, even at this level, interest rates are still extraordinarily low and it is unlikely that there would be any major effect on the equity markets until interest rates were well above 3%.

However, there is great displacement occurring in the credit markets (bond investing). As an example, this month the benchmark German 10-year bond yielded more than double from its recent lows. It is now an 18-month high at 0.58% as of this past Friday. Please note that although the German 10-year bond has doubled in recent weeks, it still has a yield of only one half of 1%. If those types of yields do not encourage stock market investing, nothing else will. Likewise, in the United States, yields have jumped up dramatically on our 10-year treasury bond, and, as of last Friday, closed at 2.39%. What is important to understand regarding this 10-year treasury is that almost exactly one year ago the treasury was yielding a lackluster 1.37% and in that one-year period has moved up to 2.39%. Despite how much you know about the credit market and bonds in general, interest rates are usually a good indicator of future economic activity. As interest rates increase, a stronger economy is being predicted, so the Federal Reserve tries to slow it down to a more reasonable level. This upward movement of interest rates also tells you that a recession is unlikely.

There has been much in the news lately regarding fake news. Every morning when I get up and read the headlines on Yahoo, I am just blown away. Did you realize that when President Trump has people to the White House, he gets two scoops of ice cream and everyone else receives just one? Really?! Now, that is the type of news that can really move the needle economically. I read almost daily on this website that the number of people in America that would like the President impeached is greater than his approval rating. I am not exactly sure where that survey was compiled, but I am willing to bet that its authenticity is in question. But again, maybe it is these headlines that are so confusing to the investing world which creates the uneasiness that investors feel.

It is much more important to look around you and see the economic reality of what is actually going on as compared to what is reflected. There is nowhere in Atlanta that traffic does not dictate your every movement. Everywhere you look, construction is ongoing, even in downtown Atlanta. This would not be the case if economic activity was down.

I just got back from London and Paris and both of those cities are covered up by tourism. Around Westminster, you can hardly walk the streets due to the number of tourists visiting. In Paris, the line to tour the Eiffel Tower winds around the block. Everywhere you look, tourists control ever restaurant, hotel, museum, and tourist attraction. Despite what you might suspect, the fear of terrorism is not deterring visitors from all over and the tourism industry is continuing to boom. It does not take a rocket scientist to realize that tourism would not be at all time levels if economies around the world were not in strong economic conditions.

President Trump recently criticized Germany’s Chancellor, Angela Merkel, by exclaiming that Germany was not a good trade partner with the United States. Of course, as always, the press widely criticized our current President with the exclamation that Germany was a strong ally of America and any criticism of Angela Merkel was sexist, uninformed or just downright nasty. I am here to tell you that I saw with my own eyes that President Trump was correct. If you drive around Atlanta, you do not have any problem finding an overwhelming supply of international cars. Mercedes, BMW, Volkswagen, and of course the Japanese automobile makers probably sell 50% of all cars actually sold in the U.S. However, in London and Paris, you see zero American cars. There are no Fords, Chevrolets, Buicks, or any type of American cars in London and Paris. Virtually all of the cars are either European made or are from Japanese manufacturers. That is exactly the point that the President was making, which was missed by the general press.

The point is that it is perfectly okay to import cars into the United States, but you must let us export them to Europe. If you are going to restrict our cars coming into your country then we must restrict your cars from coming into our country. It is such a basic concept that I am amazed anyone would have an issue with it. We are not talking about open trade – everyone votes for open trade. What we are talking about is equal trade. If you charge our goods a tariff, we will charge your goods a tariff – and frankly, it is already happening.

Around the world, companies are looking to come to the United States to manufacture since there will be obstacles put in place for countries that do not trade fairly. The fallout of this will clearly be a benefit to American employees as you will see more manufacturing jobs in the United States. The President recently announced plans for exporting liquefied natural gas to Poland. It is hard to fathom that anyone could criticize us exporting natural gas, creating fabulous new jobs in America and providing Europe with a commodity they desperately need at a competitive price. These types of subtle changes in the way business is transacted will greatly enhance America’s economy in the upcoming years.

As for the stock market, it would not surprise me to see flat summer months. We have had an extraordinarily good run in the last six months but a flat summer would certainly not be surprising. However, I feel very strongly that the market will end up higher at the end of the year than it is today. Almost every day I am approached by investors who want to know about the ultimate pullback. First off, there is no economic news anywhere to support a pullback. Yes, there are geopolitical concerns that none of us can forecast and certainly none of us can invest for going forward. However, if the economy is an indicator of the stock market, there is clearly no downdraft in place.

There are so many investors that have missed this run up in stocks who are dying to get reinvested. When you see a 20% return over the last year and you have been sitting in cash for that one-year period, the last thing you want to do is admit that you have missed a major financial opportunity. If the market would pull back 3-5%, it might actually give these people back into the markets and they would jump in and be fully invested. I am sure it sounds strange to hear me say a correction is a good thing, but at the end of the day maybe a small pullback could lead to a larger move forward in the coming months.

As we close the second quarter of 2017, it appears that the earnings are projected to be up roughly 8% on the S&P 500 Index companies. That is after a 15.3% increase year-over-year in the first quarter’s earnings. It was recently announced that the GDP growth for the first quarter was 1.7%. It is difficult to perform an analysis that would not make you believe that the GDP for the second quarter would be closer to 2.5%. And we are not the only ones enjoying prosperity. For the first time in a decade, it appears that Europe is going to have a positive solid GDP growth. Japan is also higher and Asia, as a whole, is on fire. The one thing that will always baffle me about investors is that they focus on relatively minor news to form economic forecasts when it is very simple to focus on the following three questions: Are interest rates still low? Are earnings still good? Is the economy solid? As pointed out above, all three of these major market forecasters are very much positive at the current time.

I could write a whole blog regarding dangers to the U.S. economy. However, none of those dangers are things that we can forecast today. What we can forecast is what the economic cycle is at the current time. Might there be recessions two to three years out? Of course, there might be, but that would give us a long time to react with your investments between now and then. For the current time, the market appears to be stable and moving higher. I always wonder how people who have sat in cash for the last couple of years justify that position. I guess that is the old thought that you can justify your actions with some sort of negative assertion. However, unequivocally they have been mistaken. As always, we invite you to visit with us so we can make sure you are on the right path to meet all of your goals.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins