January may have presented the buying opportunity many investors have been waiting for, as global stocks were impacted with the story out of China, regarding the coronavirus. The impact so far, appears to be blown out of proportion, thanks to the media, ranging from Reuters to the Washington Post as coverage painted unnecessary apocalyptic scenarios. It should be noted that these journalist/opinionist are not held to the standards of any financial regulator or governing body. Novice investors would be wise to understand news outlets such as the Wall Street Journal, Bloomberg News or CNBC are not in the business of providing research, and alternatively derive their income from advertising revenue. In this month’s issue of The Samra Report, we focus on the factors we believe to be the driving forces early in 2020.
“In the past 5 years the top 20% of companies have repurchased $975 billion of stock, equal to $381,000 per employee” (Devulapally). Investors concerned with how much steam is left in the market, should consider if these companies would buy their own stock if they lacked conviction in their future earnings. Novice investors, the media and in our experience most financial advisors discuss the topic of Bull and Bear markets. However, few discuss secular Bull and Bear markets.
Secular Bull Market: A prolonged period of above-average total returns where drawdowns are relatively shallow and recoveries from pullbacks are relatively rapid, and Secular Bear Markets: a prolonged period of below-average total returns where drawdowns are relatively severe and recoveries from pullbacks can take a long time.
According to J. P. Morgan’s Giri Devulapally, Portfolio Manager of U.S. Equity Group, a secular Bull market for equities began in February 2016. Devulapally further believes “annualized total returns should average in the double-digits until 2033 to 2035”
In November, Fed Chairman Jerome Powell warned Congress that “the new normal now is lower interest rates, lower inflation, probably lower growth…all over the world.” A great story for equities, as corporations continue to borrow at historically low rates, a strategy synonymous with financial recovery. However, with rates hovering around 2%, the Fed has one less tool in its arsenal should recessionary fears become reality, as the Fed would be unable to cut short-term interest rates by 5%, which has been typical of Fed behavior during a recession. A similar hurdle faced by the majority of central banks, as “a third of global bond yields fall to below 0%”. Although a red flag, we believe investors of bonds and cash are likely to move into equities, unwilling to accept low returns for what has become a prolonged period. With U.S. equities expressing strong fundamentals, and a P/E ratio of 18x, we believe investors with a risk-on mentality are likely to benefit in 2020.
The deadly coronavirus that has many Chinese employees working from home, has sent shockwaves across global markets, allowing oil to slide into Bear market territory as travel demand falls rapidly throughout Asia. Although the Supply and Demand equation appears as though oil may fall lower, investors should understand that storing oil is no easy task. Though demand may have fallen, supply of oil is problematic, that is until storage capacity depletes. Risk averse investors may consider the benefits of investing in the energy sector, a sector that has underperformed its peers over the past 5 years, consisting of companies with trends of consistently paying strong dividends. Furthermore, it is unlikely the effects of the Coronavirus will be as severe as the 2003 SARS virus, that cost the global economy $40 B, as China has acted swiftly in containing, and communicating. Impact of this scale is likely to give the United States greater leverage in the signing of a Phase 2 trade deal.
Disclosure: All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. The information contained here does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. Investing involves risk including loss of principal.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index.
Returns are shown without deductions of advisory fees, trading fees or internal management fund expenses. The deduction of such fees and expenses, and the compounding effect of such fees over time, will reduce returns over time.
*Amended February 4th, 2020.
References
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