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“If you don’t read the newspaper, you’re uninformed. If you read the newspaper, you’re mis-informed.” This is a quote from Mark Twain, and it is just as apropos today as it was over a century ago. There is a deluge of information in the world today, and it really would be difficult to completely ignore it without living under a rock. Sadly, if you try to keep up with current events you may end up wishing you had stayed under that rock.
Most likely you have heard the term “fake news.” Regardless of your news source, you’re almost certain to have heard your media of choice call one (or all) of its competitors fake. So, it is a perfectly valid question to ask: Is there a single dependable source of news in the United States today? Due to the ever changing business model of media over the past decade, I believe the answer is no.
With the slow demise of print media over the 21st century, much of the media’s business model has changed over to the “click bait” scheme. Even reputable news sources frequently post fairly outlandish headlines or editorials in order to bring in traffic to their website. The local news has abided by the rule of “if it bleeds it leads” for decades, and now that philosophy has bled over to the rest of the media.
Why the heck am I talking about political science in a financial newsletter? The reason for that is because the click bait business model has now found itself heavily embedded into financial news.
For the past ten years I can’t remember a week that has gone by without seeing at least one article predicting a 50-80% crash in the stock market. Just over the past week I can recall headlines stating we are in a tech bubble bigger than the dotcom boom and another referencing the “Hindenburg Omen,” which is a little known technical analysis theory predicting imminent market collapse.
Many times when you read one of these articles it will make mention that the “expert” also successfully predicted the last two bear markets. However, what the article will omit is that the expert actually predicted twenty four of the last two bear markets. Essentially, a broken clock is still right twice a day.
Staying abreast of financial news in order to manage money is hard, and this type of news coverage makes a hard task even more difficult. After all, the biggest single key to successful investing is staying in for the long haul. That becomes a daunting task when investors are bombarded on a daily basis with “experts” predicting imminent doom and suggesting investors buy gold bars.
I suspect financial headlines will continue to be sensationalized for the worst. In the end, a story predicting the next Great Depression will always get far more eye balls than an article reviewing same store sales from McDonalds. So, because of this it is important to know the facts. If you look at return data from the S&P 500, the markets are overwhelming positive the majority of the time over the past 90 years. Over this period, in any given year, returns were positive 73% of the time. On a 3-year rolling basis, returns were positive 83% of the time, and on a 5-year rolling basis, returns were positive 87% of the time.
I must point out that painful market corrections can and will happen. Large bear market corrections occur about every 5 years on average. This realization is why long term investing can be so difficult. However, unless an investor has a compelling reason to not be invested, it would be wise to stay in the markets; otherwise, you are fighting odds that are against you. Most importantly, if you choose to fight against these odds make sure you have a strategy to eventually reinvest in case you are wrong and your bear market thesis turns into fake news.
-Ryan Glover, CFP®
Star Wars fans endured a 16 year lull in between the end of the original trilogy and the launch of the much anticipated prequel films. What were fans rewarded with after all that time? For all their anticipation all they got in return was one of the most hated and mocked films of all time. And, at the center of the story line, Intergalactic trade.
In short, it is REALLY boring to talk about the finer details of trade. However, as you turn on the TV nowadays you’d never know this from the consistent talk of a global trade war and impending financial doom. How does an investor make heads or tails of this chatter?
First of all, take anything you hear about trade with a massive grain of salt. International trade is a centuries old system that is incredibly complex with very few people (if any) that have a significant grasp on it. Just consider the car you drive. It has around 30,000 parts, and it would be a daunting task to track down the country of origin for just a fraction of those parts. Now imagine having a firm grasp on the of the rest of the US economy’s $18 trillion GDP—Good luck!
While the trade war fireworks between Donald Trump and the media are mildly entertaining to watch, the real economic story here is the meteoric rise of China from an agrarian society to an industrial power house. In just two short decades the per capita production in China increased an astonishing 1,000%, going from around $800/year to the current $8,000/year in goods and services produced per person. To put that growth into perspective, US production increased only around 75% over that same time period.
Part of the reason for China’s incredible success over the past 20 years is that it was allowed to compete on the world stage essentially with training wheels on. For years China utilized a manipulated and undervalued currency and widespread industrial subsidies from the central government.
Many people, including myself, have assumed that China’s success in manufacturing was based primarily on low wages. However, labor in China are far from cheap now thanks to manufacturing wages tripling in the last 10 years. So, there are clearly other factors to consider for Chinese manufacturing success.
Let’s take a look at the global implications of Chinese industrial subsidies when left unabated. According to a research piece by the Alliance for American Manufacturing, it is estimated that the Chinese government gave out energy subsidies totaling about $27 billion between 2000 and 2007. About 95% of this amount was earmarked towards the coal industry (the primary ingredient of steel). U.S. consumers and the rest of the world enjoyed cheap steel and coal at the time, but there was a steep price to pay. Fast forward a decade and nearly every coal and steel producer in the U.S. filed bankruptcy between 2014-2016 due to highly depressed commodity prices.
There weren’t many tears shed for the death of the coal industry in the United States. It was considered an “unclean” relic of industry on the way out the door. However, the same story played out in emerging industries like solar panels and 3D printers during the past decade. Bristling young companies with profit potential were brought to their knees repeatedly by Chinese competitors dumping product at a loss, most likely thanks to back-end government subsidies.
With China’s emergence onto the global stage this century, it is time for it to start playing on a level playing field with the rest of the industrialized world. This either means a substantial reduction in industrial subsidies or enduring global tariffs enforced against most of their exports.
It is almost unanimously considered that trade wars are negative for all participants in the short-run. For investors this may cause some heart burn in the months to come. However, it is my opinion that the economic changes needed in China will end up being a positive for all parties. After all, the long term elimination of dumping policies should equate into greater profits for business, and thus greater profits for your portfolio.
-Ryan Glover, CFP®
What a crazy year of epic upsets, shocking meltdowns, and volatile outcomes — and I’m not talking about basketball! This roller coaster of a first quarter has left nobody with a perfect investment bracket, but there’s still time to position yourself correctly to claim your one shining moment by year end. With that in mind, let’s take a look at the top investment themes thus far in 2018 and see which ones will advance to our 6th annual Investor’s Final Four.
Coming out of the Midwest region, we have the Volatility Index (VIX) making an appearance after being absent from last year’s tournament. The VIX is the market’s so-called “fear gauge”, and it hit an all-time low in 2017 and produced a year of record low volatility. So far in 2018, the exact opposite has come to pass. We’ve seen 7 moves of 20% or more in the VIX in the first quarter, which is the most ever. On the opposing sideline we have perhaps an equally volatile team led by Coach Trump. POTUS takes credit for the impressive run in the Markets last year, but his coaching style has also contributed to the erratic flow of equities so far in 2018. While his program is still under FBI investigation, look for more staff turnovers and more zone coverage tariffs on defense to stifle POTUS’s run deep into the tourney this season.
In the East, we have a perennial powerhouse under new leadership. The Federal Reserve has a new coach as of February, and Chairman Jay Powell has started off his tenure by following the playbook of his predecessor. Having eased off the full-court printing press of years past, the Fed now has taken more of a ball “hawk” defensive style. The Fed raised interest rates three times in 2017 and consensus points towards a repeat performance in 2018. This steady boring style of defense should curtail inflation, but leaves them susceptible to an upset early in the tournament. Enter bitcoin — making its first appearance in the investor’s bracket. This crypto-currency is making headlines all over the world in 2018 and becoming a phenomenon that no one can ignore. While the meteoric rise since its founding in 2009 has caught significant attention, what garners the most consideration this year is the continued volatility and massive decline in value. From its peak in January, bitcoin dropped nearly 60% by early February. Stay tuned for more gaudy headlines, and don’t be surprised to see an epic shocker like UMBC’s dismantling of UVA.
In the South region we have a matchup between the old guard and a relative newcomer. So far in 2018 we’ve seen a resurgence in initial public offerings (IPOs). Especially those of the so-called unicorn variety. These once private companies with $1 Billion or more valuations, such as Dropbox, Spotify, etc. have come to market with a lot of hype and delivered hot shooting in their first quarter of trading. On the flip side, the bluebloods of FANG (Facebook, Amazon, Netflix, and Google) have been underwhelming this year after providing market leadership in 2016-17. Talk of regulation in the computing world of data has investors spooked temporarily, but we wouldn’t be surprised to see FANG return to top form before the year ends.
Finally, in the West we see a surprising top seed. The Bovespa, or Brazilian stock exchange equivalent of the S&P 500, is the best performing global index through the end of the first quarter. Don’t bet too much on this Cinderella story as most pundits think it will be difficult to replicate the 11.73% year to date performance in later rounds. Their opponent, The Tax Cuts & Jobs Act (TC&JA), enters the field after making a buzzer beater in the conference tournament at the end of 2017. The lowering of both individual and corporate tax rates pursuant to the TC&JA should start to yield returns in the markets and economy in 2018. Hopefully, the stimulative effect will be more than just a handful of bonus free throws. However, we’ve yet to see how investors and companies will use the extra cash in their pockets. Either way, we still expect a positive outcome for investors that stick to a diversified approach.
-Walter Hinson, CFP®
We’d like to wish a very happy New Year to all our valued clients. 2018 is special for us as it is our 10th year in business, and without our clients we’d look silly writing these newsletters every quarter.
Year in Review—The success of our 2017 predictions is a bit mixed, but we were spot on where it mattered. Our core prediction was for the market momentum that started with the Trump election to continue for the entirety of 2017. Returns for the year were stellar for equities of all types, and the manner that they were achieved was quite interesting as well. Despite the volatility that is perceived by many in politics, the markets had one of their least volatile years on record without recording a single negative monthly return.
We also predicted the Federal Reserve would increase rates twice during 2017, and we weren’t far off. Rates changed three times for a total increase of 0.75% for the year. We also predicted that these increases would cause the dollar to appreciate, however, we got that trend incorrect as the dollar depreciated around 10% against many major currencies during 2017.
Our biggest miss for the year was a prediction that we’d see the first major overhaul in Social Security since the Reagan years. While we did manage to close out the year with a historic tax reform bill, Congress was especially careful to not touch anything Social Security related. This proves that the topic is so cancerous in the political realm that we will most likely not see a voluntary overhaul to the system for decades to come.
2018 Predictions—The big question for market prognosticators is how much gas is left in the tank of this nearly decade long bull market? The answer to this question is predicated on a debate that has raged in economic and political circles for nearly 40 years. The Reagan administration coined the term of “trickle down economics” based on the idea that individuals are better stewards of their money than the government, and if given a lower taxation rate we will see stronger economic expansion for all.
If trickle down economics works, then our current bull market may have been refueled with enough gas to go another 2-3 years. 2013 was the last time we saw a 20+% increase in equity prices, and the following year we saw another increase of 10%. For 2018 we’re looking for a similar story with expectations of low double digit returns for US stocks. However, it’s unlikely we go a second straight year with ultra low volatility, so it would be reasonable to expect a 5-10% correction sometime during the year.
For a second straight year, our baseline expectation is for two more Fed interest rates hikes for an annual increase of 0.5%. The reason for these increases will be continued domestic economic expansion and GDP growth of between 3-3.5% for 2018. The wild card may be the new leadership beginning in February when current Chairmen Yellen steps down and is replaced by Trump nominee, Jerome Powell. Mr. Powell according to most pundits is expected to maintain a similar style of operation and interest rate trajectory to his predecessor, but we really don’t have any historical data to base that on.
Finally, it wouldn't be fun unless we made an outlandish prediction on the value of Bitcoin. We’ve seen others make predictions from $0 all the way up to $1 million. About 0.1% of the world population has a meaningful holding in Bitcoin, but the way it has been covered in 2017 you’d think that number was 25% or higher.
While we are not bearish on the future of the block chain technology that Bitcoin was built on, we are less bullish on the forward case of Bitcoin and other non-governmental issued cyber currencies. Followers of Bitcoin may remember the collapse of one of their major exchanges in 2014, Mt. Gox. Our 2018 outlook for Bitcoin is negative, and we are expecting to see another major exchange failure commensurate with what was seen in 2014. If any newly minted Bitcoin millionaires are out there reading this, don’t quit your day job just yet.
-Ryan Glover, CFP®