A Lot of Complacency
The stock market made a noticeable up, down, up move in the second quarter ending June 30, 2019. Each time news on China, Iraq or the Federal Reserve came out, the markets changed direction. Exhibit 1 shows the performance of various major market measurements for the first six months of this year.
Before getting too excited about these numbers, consider this: The market as measured by the S&P 500 Composite has not had any net return (0%) since October 1, 2018. That is a nine-month period with no gain! But, if you listen to the press and various pundits, you would think we were in a new bull market. Also note that this zero return in the stock market since October compares with a +14% return in the 20-year U.S. Treasury bond.
In addition, all of our Oxbow strategies are positive in this same nine-month period. In our Oxbow-managed stock accounts, we’re often asked why we have a 25% cash position (mostly in U.S. Treasury notes). The primary reason is there’s a lack of quality names available to own at value prices. Further, “crazy times” are back on Wall Street. Notice Exhibit 2, which shows the percentage of companies going public that are losing money.
In the Exhibit 2 table notice as well the different companies that have come to public markets-and the millions of dollars they are losing. Only on Wall Street … It reminds us so much of 1999 when the same stupid information was being distributed. At that time, the buzzwords were “a new paradigm,” and that it was, but it wasn’t what most investors expected.
The Buyback Conspiracy
We have written about this in previous Market Comments. The stock buybacks by public companies roll on. A primary driver of the stock market over the last 10 years has been buybacks. Please note the chart on Exhibit 3 tracing the history of buybacks since 1999 compared with the S&P 500 Composite. Notice particularly the huge buyback numbers over the last four quarters. Almost a trillion dollars, and yet the stock market has gone nowhere in nine months. As we have said all along, give us the money in the form of dividends, then we as shareholders will decide what to do with our money. Sadly, this wouldn’t fulfill the role of all too many corporate managements when they vote themselves huge compensation packages. Fortune magazine states that in the 1950s the typical CEO in the U.S. made 20 times the salary of the average worker. Last year at S&P 500 firms the average CEO pay compared to the average worker soared to 361 times. If you wonder why the politics of extreme are with us today, it has a lot to do with the implosion of the middle class.
Yields Keep Falling
Last summer we at Oxbow made a major call on interest rates falling. At the time we had very little company within the investment community who shared this view. In fact, interest rates did drop well into the first quarter of 2019. Since then they have moved even lower. Exhibit 4 shows the 10-year U.S. Treasury yield since April 1st of this year.
Inflation is on the decline all over the world, but for some reason our Federal Reserve Board has not gotten the message. They have consistently been behind the curve when deciding lower interest rates. Debt levels in the U.S. and throughout the world are so high that meaningful move in GDP (Gross Domestic Product) becomes very difficult. Yes, it’s true that unemployment is very low, but upon taking a closer look, we see that most workers aren’t making much money to speak of.
The markets started celebrating the Federal Reserve’s decision to stop raising rates after the December 2018 hike and currently are considering lower rates. But remember 1999 to 2000 when the markets thought the Fed had come to the rescue? See Exhibit 5!
The cover of The Economist magazine in early 2000 shows the Federal Reserve taking care of it. After the first interest-rate cut, however, the markets fell over -50% as the rate decline did little good. What are we saying? “Don’t bet on the farm” on the Federal Reserve coming to the rescue of the stock market. They have an academic beat but unfortunately they tend to look backwards at the data.
Having said all of the above, we still contend that we are in the latter stages of this market’s upward move. July marks the economic recovery in the U.S. becoming the longest ever — even longer than the 1960s and 1990s.
One key difference is the current economic growth we have had relative to other growth cycles. When an expansion lasts this long it creates tremendous complacency. It also creates many investments that don’t make common sense. Try not to lean on the Federal Reserve as the ultimate rescuer, as we’re in a mature bull market. Consumers’ confidence is at an all-time high, and in the past, they were usually wrong. Most everyone now is discussing indexes, fees and the latest Wall Street ETF (Exchange Traded Fund).
We at Oxbow always make this comment to business owners who have recently sold their companies, “Your main goal should be to not lose the money you have made.” That same advice can be used by everybody.
By all accounts, this should be an interesting summer. At Oxbow, we are ever vigilant of the financial environment. In about four weeks, we will send our usual video update. Until then, have a great summer.