March saw the stock market (S&P 500) decline over 30% year-to-date, and although many investors found this as an opportunity to buy at prices not seen since February 2017, the message from the ‘Oracle of Omaha’ seems to carry confusion. In his annual letter to shareholders, Buffett said “it is almost certain that equities will over time perform far better than long-term, fixed-rate” bonds, given the attractive corporate tax environment. Mr. Buffett’s guidance, however, appears to conflict with the asset allocation of Berkshire Hathaway (BRK.A), amassing $137B in cash, of which $1.8B has been used for stock repurchases. This month’s issue of The Samra Report provides our consensus for June and beyond.
According to the Global Macro Outlook from Alliance Bernstein “early indications confirm that the hit to the global economy from measures to contain the coronavirus is likely to be unprecedented.” Leading to the company lowering their global growth forecast to -4.6%, almost twice as large as the decline seen in 2009. At Samra Wealth Management, we believe investors have reason to be concerned as the forward 12-month P/E Ratio for the S&P 500 is above 20.0, reaching levels not seen since 2002, in the midst of falling earnings per share.
In our May issue of The Samra Report, we stated “investors would be wise to understand the economic make-up of our nations GDP. 68% of U.S. GDP is derived from consumption spending, with an economy on the brink of shut down, a minimal decrease in Gross Domestic Income will likely lead to a downshift in consumer confidence, proving demand is a function of income. In the near term, the case for economic expansion is correlated to population growth and productivity. With the nation on lockdown, the script for economic expansion is flawed.” Investors are now placing too great of an emphasis on a vaccine, investors would be wise to understand that a vaccine may work to prevent further outbreaks, unless the virus evolves, however a vaccine will not replace household income per capita.
Furthermore, consumption spending is not only a function of household consumption; however, investors should understand that similarly corporation are likely to limit capital expenditures throughout the remainder of 2020. With the latest unemployment numbers showing 40.8 million workers out of work, representing 26% of the civilian workforce. Investors should be asking themselves the same question that prompted an on-air heated exchange between Andrew Ross Sorkin and Joe Kernan on CNBC’s Squawk Box: “How can stocks be where they are right now based on: oil prices, interest rates, economic indicators, and earnings?” The below chart from Bank of America shows the market blindly appreciating as the number of unemployed continue to grow.
As the Federal Government assists with numbing the pain through stimulus measures, placing a further strain on the public-sector balance sheet, investors should be prepared for the interest rate environment to stay lower, for longer. A case for potential weakening of the trade weighted dollar, currently at a historic high, creating an environment for an increasing trade deficit.
At Samra Wealth Management, we are sitting in the most conservative position since our inception. We are choosing to hold higher levels of cash over short-duration bonds. Similarly, to Warren Buffett (Berkshire Hathaway) and Bill Ackman of Pershing Square Capital Management, the liquidation orders significantly outweigh the purchase orders. Suggesting some of the names most synonymous with Wall St, do not believe it is a great time to buy stocks or bonds. Furthermore, it is our belief that conservative investors, pension funds and endowments are at the most (opportunity) risk, in an environment with low interest rates, uncertain commercial real estate returns, questionable dividends and mandates to limit risk exposure. At Samra Wealth Management, we believe an active management strategy is likely to out-perform passive investments as we venture into uncharted territory.
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.
References
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