Tag Archives: Historical Market Performance

On The Limits of Perception, The Power of Math, and Human Behavior

Here is the English version of my most recent article in Forbes Latvia. If you are heavily invested in technology stocks, you might want to pay particular attention…

I am going to tell you a story whose provenance I cannot ascertain, but that speaks to the limits of perception, the power of math, and human behavior.  

The one constant of this story is that there is a chessboard. Other key components are 1) a king or emperor, (2) a man, and (3) grains.  

Now at this point you might have guessed the story, but you will remember it the way you first heard it, and will most likely not know the alternative endings. For those of you who have no idea what I am talking about, here we go…  

read more

Post US Election Update

Last month, we wrote an article for Forbes magazine about how this year’s US presidential elections could impact the stock market.

https://www.axios.com/election-results-2020-trump-biden-3a07f4c7-fb4d-4d62-b18b-392ff6f1eeb5.html

Here is how our prognosis stacked up to what has come to pass over past couple of days:

The impact of mail-in votes

“The first major issue is that Covid-19 restrictions will create a very different in-person voting environment than in previous elections. It is also anticipated that there will be a record number of mail-in votes, which take considerably longer to tabulate. This means that there could still be many votes to count in the days following November 3rd.  

read more

What’s Better Than Bitcoin? Companies That Dig Rocks (Seriously!)

We get a lot of questions about cryptocurrencies. Especially when there is upwards price movement. No one ever seems to ask about them when they are not performing so well… I always answer, that I cannot buy cryptocurrencies for clients, and that we are fully committed to finding profitable opportunities elsewhere.

One example is our investment in copper miners. Copper miners?!? Yes, copper miners.

Since the lows of March 16th, copper miners Freeport McMoRan and HudBay Minerals have actually outperformed Bitcoin:

read more

OUR JUNE RESULTS

Our weighted average return in June was +4.54%. Since 2015, we have generated a net return of +33.44%.

In terms of investment strategy performance, our weighted average net returns for June were (a) +1.88% for conservative strategies, (b) +4.76% for balanced strategies, and (c) +5.59% for aggressive strategies.

Stocks rallied in June following the false tariff escalation with Mexico at the end of May, and the S&P 500 ended the quarter near all-time highs. Hopes for reduced trade tensions between the U.S. and China following the Tokyo G-20 Summit ‘truce’ helped drive the rally, but it is hard to perceive any real progress. Although both sides agreed that they would not increase tariffs and China committed to purchase more U.S. goods, this is very similar to the ‘truce’ reached seven months ago at the previous G-20 summit. This protracted dispute has pushed down trade and business confidence worldwide, with the manufacturing sector in most Asian countries declining and expectations of an economic recession in Germany seen as inevitable (Germany’s high dependence on exports and the Chinese market means ever greater uncertainty until the customs dispute is resolved). Without actual trade deals that provide certainty to businesses, global growth will not be picking up.

read more

OUR MARCH RESULTS

Our weighted average return in March was +0.10 %. Since 2015, we have generated a net return of +37.64%.

In terms of investment strategy performance, our weighted average net returns for February were (a) +1.01% for conservative strategies, (b) +0.30% for balanced strategies, and (c) -0.46% for aggressive strategies.

March was another positive month for financial markets. In December, markets sold off strongly on fears that the US Fed would continue to raise rates. The Fed buckled and now markets are pricing in the likelihood of a rate cut rather than a rate hike. Both bonds and stocks continued to gain strength on the back of this sentiment. Last month, the S&P 500 (SPY US) rose +1.81%, the MSCI Emerging Market index (EEM US) gained +1.13%, High Yield US corporate bonds (HYG US) rose +1.29%, Emerging Market bonds (EMB US) gained +1.51% and US investment grade bonds (BND US) returned +1.94%.

read more

OUR FEBRUARY RESULTS

Our weighted average return in February was -0.47%. Since 2015, we have generated a net return of +37.50%.

In terms of investment strategy performance, our weighted average net returns for February were (a) +0.79% for conservative strategies, (b) -0.88% for balanced strategies, and (c) -0.53% for aggressive strategies.

Financial markets continued their positive trend in February, fueled by more encouraging US-China trade talks and heightened confidence that the Fed would not be raising rates in the near future. “Lower rates for longer” translated into higher prices for high yield debt across all markets and equities continued their positive trend. In February, the S&P 500 (SPY US) rose +3.24%, High Yield US corporate bonds (HYG US) rose +1.21%, Emerging Market bonds (EMB US) gained +0.40% and US investment grade bonds (BND US) returned -0.09%.

I am at a loss to report anything of note that actually happened in financial markets or world politics in February. Brexit discussions dragged on. Tariff implementation was extended and trade deal discussions continued without any actual agreements. Softer Chinese economic data was interpreted to mean greater Chinese stimulus going forward, but Chinese industry seems to be more concerned about tariffs. European growth continued to be anemic. European industry is also worried about tariffs. Data revealed that German economic growth was flat in the last quarter of last year.

Only the US showed that, despite the impact of the government shutdown, everything seemed to be going fairly well. Data showed that US GDP grew +2.6% in the fourth quarter. This was slower than the previous 3.4% quarter on quarter annualized growth rate in Q3, but showed that the US economy continues to be on a strong footing.

Looking at our investment performance, we were pleased at the returns for our conservative strategies, but our security selection let us down in our balanced and aggressive mandates. Long-term outperformance can only be achieved by high conviction stock picking, and some of our conviction holdings had a sub-par February. In terms of investment strategy, we continue to look for interesting companies that have not participated in the recent rally, but stand to benefit from continued lower interest rates and moderate economic growth.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
Pauls
FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.

read more

“Markets in Turmoil”

2 months ago we saw a tweet from Charlie Bilello. It was 27th December. The tweet stated that CNBC will be airing “Markets in Turmoil” episode that night. Episodes of this particular show are aired when markets have been falling hard and everyone is scared.

The tweet also included a look back at past occasions when the show was aired and the performance of the S&P 500 index following the episodes.

We’ve updated the table to include the most recent data:

Markets in Turmoil S&P 500 close 1-week 1-month 3-month 6-month 9-month 12-month Up to 2/25/2019
2/5/2018 2649 0.30% 3.70% 2.40% 8.90% 4.30% 5.41% 7.85%
2/8/2018 2581 5.90% 7.40% 6.30% 10.40% 10.60% 7.04% 10.66%
10/11/2018 2728 1.50% 0.10% -4.35% 3.29%
10/24/2018 2656 2.10% 0.90% 0% 6.06%
12/27/2018 2489 -1.59% 7.21% 12.74%

Going back to 2010 the airing of Markets in Turmoil basically has worked as a buy signal. Every single time after the show was aired 6 months later markets were higher, the same can be said regarding periods of 9 months and 12 months.

1-week after the airing of Markets in Turmoil more than 70% of time markets are higher, more than 60% of time markets are higher 1 month later and more than 90% of time markets are higher 3 months later. Since the last episode aired on December 27th S&P 500 Index returned 12.74%.

Any individual episode of Markets in Turmoil shouldn’t be taken as a buy or signal. Next time the episode could air when the markets are just starting to fall or vice versa starting to go up. Using the data and table above, we want to point out that history shows patience pays off. The longer your investment time horizon the less sense it makes to try and time every single market move. read more

OUR JANUARY RESULTS

Our weighted average return in January was +8.22%. Since 2015, we have generated a net return of +38.15%.

In terms of investment strategy performance, our weighted average net returns for January were (a) +2.36% for conservative strategies, (b) +7.64% for balanced strategies, and (c) +11.17% for aggressive strategies.

January was a considerably better month than December. As mentioned in last month’s commentary, US Fed Chairman Powell’s statement that the Fed was “listening closely to markets” on January 4th proved to be just what the market needed to stop panicking about the prospect of rising rates. The partial resolution of the US government shutdown added to positive sentiment, as did more positive dialogue regarding trade tariff negotiations between the US and China. As such, the S&P 500 (SPY US) rose +8.01%, Emerging Market equities surged +10.34% (EEM US) and Emerging Market bonds gained +4.78% (EMB US).

Emerging Market securities had a dreadful 2018, but we found it very interesting that they refused to put in new lows as US markets were crashing in December. We interpreted this price action to be a very positive divergence from the nonsense going on in US markets, as Emerging Markets tend to be more volatile than US securities. Put simply, the fact that EM securities were actually rising as US securities were falling implied that perhaps not all hope was lost. Thus far, catching this positive signal and not ‘selling everything’ during December’s panic has proven to be a wise course of action.

Despite correctly analyzing this US –vs- EM price dynamic, experience dictates that such important price movements must be confirmed by subsequent data and anecdotal evidence. This is why we also mentioned is last month’s commentary that we would “be trying to determine whether the Q4 selloff and market panic matched the actual performance of companies across all sectors of the US economy.” We took strong positive signals from the major US banks, who – despite mostly missing revenue targets due to poor trading revenues – commented that the US consumer was in good health. These statements we subsequently confirmed across most sectors as earnings season progressed.

In terms of trading activity, we added Canada Goose Holdings (GOOS US), which had sold off heavily due to a diplomatic dispute between Canada and China. Pictures of a six-block line-up to get into the new Canada Goose store in Beijing at the end of December confirmed our suspicions that the Chinese consumer might not hold a grudge. We anticipate that Canada Goose will soon release a set of impressive earnings from last quarter.

We have stated in previous commentaries that volatility creates opportunities, but this is hard to appreciate when markets are crashing, and we are very thankful to our clients for sticking with us after such a traumatic December. January’s returns were more substantial than we could have realistically hoped for at the end of last year. That being said, we are by no means satisfied and continue to seek out new opportunities that will drive even better returns going forward.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
Pauls
FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.
read more

Emerging Markets Bonds performance when US rates rise

2018 was a tough year for bond investors. US Total Bond Market (represented by BND US ETF) returned -0.1% and Emerging Markets Bonds (represented by EMB US ETF) returned -5.5%.

Looking at last year’s returns, a logical question arose: what should we do with our exposure to Emerging Markets (EM) Bonds? Should we keep our allocation unchanged, reduce or eliminate it and replace it with US Treasuries?

The logical chain of thought dictates that investors require higher rates of return for higher levels of risk. If the FED is increasing rates, increased rates provide an option to have investments in safe government bonds with higher yields than before. It raises the required rate of return for taking higher risks, thus investors require higher yields on riskier assets for example EM bonds. It should also lead to a higher spread between EM Bonds and US Treasuries.

Let us look at the historical data.

Invesco has identified 9 periods with rising US rates since 1994 to 2016. The average change in the 10-yr US Treasury yield was 162 basis points. The average return for the US Treasury Index during those periods was -4.65%. Further, we look at how EM Bonds returns have compared to US Treasuries.

The above graph shows the difference between EM Bonds returns and US Treasury returns during previously identified periods. In 7 out of 9 periods, EM Bonds have outperformed or delivered higher returns in periods when US rates were rising.

EM Bonds are more volatile than US Treasuries, though investing in emerging markets debt over the long term has rewarded investors historically. Let us look at the example where an investor would enter the market at the “worst” possible time (at the beginning of 2007 before financial crisis).

J.P. Morgan EMBI Global Total Return Index (White), S&P 500 Total Return Index (Yellow), Bloomberg Barclays US Treasury Total Return Index (Pink)

J.P. Morgan EMBI Global Total Return Index (JPEIGLBL), S&P 500 Total Return Index (SPXT), Bloomberg Barclays US Treasury Total Return Index (LUATTRUU)

Over the chosen period of 01/01/2007-01/18/2019 the best performance was delivered by investments in the large cap stocks (represented by S&P 500 Total Return Index), in total returning 143% or 7.66% annualized. That’s after the recent fluctuations in global markets. EM Bonds returned 104.96% or 6.13% annualized while US Treasuries returned 51.27% or 3.49% annualized.

Further, we look at investments in EM Bonds from a mid-term investment perspective.

Source: Bloomberg, J.P. Morgan EMBI Global Total Return Index

The above graph shows annualized 3-year return for investments in EM Bonds. Since 1996, there has been only one 3-year period with a negative return for EM Bonds, with a total return -0.21%, or -0.07% annualized. The average total return for 3-year investment in EM Bonds since 1996 was 32.9% or 9.9% per annum.

We can conclude that rising US rates does not result in worse performance delivered by EM Bonds investments.  Historically, EM Bonds on average have outperformed US treasuries in periods when US rates were rising. Over the long-term, EM Bonds have significantly outperformed US Treasuries. Furthermore, the average 3-year return per annum has been 9.9% since 1996. Increased allocation to US Treasuries could provide lower overall portfolio volatility in the short term, yet may position the portfolio to miss the potential higher performance of EM Bonds over a longer period.

 

FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities. read more

OUR NOVEMBER RESULTS

Our weighted average return in November was -0.96%. Since 2015, we have generated a net return of +38.73%.

In terms of investment strategy performance, our weighted average net returns for November were (a) +0.15% for conservative strategies, (b) -0.09% for balanced strategies, and (c) -2.11% for aggressive strategies.

Markets continued to be extremely volatile in November. The S&P 500 index traded all over the place, giving up -3.83% in the third week of the month, before jumping +4.71% the very next week. By month end, the S&P 500 had gained +2%. Emerging market stocks (+5.07%) finally managed to rally on the back of lower US bond yields, and US investment grade bonds ended the month +0.64%.

Politically speaking, the US mid-term elections played out as expected with the Republicans gaining seats in the Senate, and the Democrats claiming a majority in the House of Representatives. A Democrat majority in the House will now be able to curtail Republican attempts to expand fiscal stimulus to ingratiate themselves to voters before the Presidential elections in 2020. Party politics aside, the overwhelming political issue in the world today remains US-China trade tensions and the continued uncertainty as to whether a deal will be able to be reached or not. Uncertainty abounds in Europe as well due to Italy’s budget issues and Brexit.

As such, we are in an environment where companies are recording record earnings, but their future ability to generate profits are being heavily discounted due to political uncertainty. This is evident in the price action that we are seeing in certain sectors of the market.

For old school portfolio managers with an equity mandate, volatile markets mean moving assets into defensive sectors such as consumer staples and utilities. As a result, these sectors have performed very well since the summer, whereas growth sectors such as information technology and biotech have sold off heavily. Conceptually, this makes a lot of sense, but in actuality, this is purest form of trying to ‘time markets’ and intuitively speaks to why most portfolio managers fail to beat their benchmark indices in the long-run. How so? Because most often this means chasing returns and ignoring fundamental valuation principles that are the foundation of long term outperformance.

For example, let us take a look at a classic consumer staple stock: Proctor & Gamble. P&G has a number of different brands that households use every day, from skin care (‘Olay’), to laundry detergent (‘Tide’), to diapers (‘Pampers’), to dish soap (‘Fairy’). The ‘every day’ use of these products is the critical component of why P&G is considered consumer staple company. P&G is great company, but it faces massive challenges on a daily basis to stay relevant to its consumers who are constantly tempted by new, upstart brands with product descriptions that say things like “small batch” or “artisanal”. P&G’s sales have been flat to negative over the past four years and they pay high multiples to acquire new brands (their last acquisition was done on a 5x price to sales valuation…). All of this would be fine if not for the fact that P&G shares trade at a steep 23 times next year’s earnings, with no intrinsic growth in sight.

Now, let us take a look at Apple. Apple makes the most successful and possibly most technologically advanced consumer product in history: the iPhone. With the exception of infants wearing ‘Pampers’, anyone with an iPhone spends considerably more time on this device on a daily basis than they do with every single possible combination of P&G products, and, from anecdotal evidence, even infants would rather use an iPhone than a diaper. However, since Apple became the first company to exceed 1 trillion in market capitalization this summer, Apple shares have lost around 30% from their highs – or 365 billion USD in valuation. This equates to 1.5x the current market capitalization of P&G. A practically unfathomable amount.

Although Apple’s sales have also slowed in the past couple of years, they remain astoundingly high. From a valuation perspective, after removing the net cash component from their market capitalization, Apple currently trades at a 10.72 next year’s earnings – which means that the market values every dollar in earnings that P&G generates as twice as valuable as a dollar earned by Apple. Yes, I understand that we are comparing apples to ‘tide pods’, but I welcome any and all arguments that attempt to justify this dynamic above and beyond short term price movement.
We have not owned Apple shares for quite some time. This was due to the fact that we saw more compelling growth opportunities or relative value elsewhere in the market. However, at these valuations, Apple is once again a screaming buy and we have initiated large positions in Apple over the past couple of weeks. By the way, the last two times Apple shares traded at a P/E multiple this low, they rallied over 130%… Overall, this sell off – although fraught with much near term negative price action and flat out stress – has given us the chance to buy back shares of companies that we deem to be the consumer staples of the future at significant discounts to where they had been trading for a long period of time. It is hard to be thankful when you are in the second month of negative returns, but this is a battle won with sound rationale and patience.

A year from now we will be talking with prospective clients that ‘knew’ that they should have been buying Apple shares ‘at the end of 2018’ but found some reason not to. They will say something to the effect of ‘yes, Apple @ 170, that was easy money’. We will smile and agree. Not because it was easy, but because we actually did it.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!
Pauls
FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.
read more