Beginning of a Goldilocks Period?

They say, “The Trend is your Friend” but sometimes the Trend can also betray you. And perhaps now it’s the time not to follow the trend everywhere. One must be wary of rallies caused by those following dogmatic technical algorithmic regimes. “Buy the Dips and buy the Tips” but then sometimes it doesn’t work and all of a sudden everything comes crashing down. The death of Santa rally, last December was exactly one such period. Are we, therefore, at the beginning of the so called “Goldilocks period”, i.e., sustained moderate economic growth or is this the beginning of a very volatile Quarter, when Asset Managers and clients alike are better advised to keep a very close ear to the ground.

At Swiss Wealth Solutions, we realise that we are all at the edge of a volatile market condition. Our constant endeavour is to illuminate the Market trends and provide guidance and advice for our fellow clients. And we pride ourselves in our Advisory role, specifically in such volatile market conditions. In 2019, complacency will not pay and one really has to ask the sustainability of a saturated US market, pushed higher mainly by a few stocks, i.e., with the like of Facebook, Apple, Amazon, Netflix and Google (FAANG), including Microsoft, Boeing and Caterpillars of this world.

Despite the strengthening of the US Dollar, the global growth continues to weaken and with it the outlook for the stocks. A number of analysts contribute the strengthening of the Euro against CHF, with the new breeze, coming mainly from Germany and to a certain extent from France and Macron. This however, is a very gentle breeze indeed. The economic reforms put forward by Macron is nothing new. These reforms are nothing but a mere copy of what Margaret Thatcher advocated back in the 80s. And we all know the consequences of her actions. Three generations of unemployed in the vast majority of the north and a Brexit. Therefore, these analysts might be right in the short term. The slowdown in the rise of the US FED funds rate, the actions by the ECB are not as effective. And as there is no more patient capital in the system and everyone is looking for yield volatility is to rise.

Chinese reserves are approximately 3 Trillion (i.e., they have bought 3 Trillions of US Treasuries) and if this figure falls below 3 Trillion, the Chinese Yuan will devalue. The US has 19 Trillions of debt and rising and China imports 8 Million Barrels of Oil a day. The deleveraging process in Europe needs to go further. Therefore, extended Austerity periods for Europeans. And that, in particular for south European countries like, Greece, Spain, Italy and Portugal. Not mentioning the rising migration problems in Europe, the Brexit and the recent turmoil in France.

Active vs. Passive Investment

And then there is always the question – will Active management pay-off?

One of the most comical aspect of the above question is that there is a debate at all, about this subject. There is always a lot of noise about the big players like Mr. Buffett or Mr. Ackman, their winnings and trading strategies. The truth of the matter being – by definition “Not all active managers can win”. And as such, there will be winners as well as losers in this game. This does not mean that joining a good active manager is a complete waste of time. There are fantastic active managers, strategist out there and for this, Bill Sharp framed it beautifully. He basically pointed out that the Market is Capitalisation-Weighted, i.e., weighted according to the total market value of their outstanding shares. The indexes and the index Funds are also capitalisation-weighted. Pull them out of the portfolio and what are you left with, the same portfolio that’s what the active managers own. The portfolio therefore can’t beat the Index Fund. Therefore, collectively they cannot win. And hence when people talk about, this market is good for active manager and that market is bad for the active managers, they are talking a lot of nonsense. What one can say, is that during volatile months it should be expected that active managers get more out of the market than passive ones. And this is due to the fact that during turbulent times Index Funds and ETFs average out the winnings within a group of stocks, where as a smart active manager can bet more on the winners than the losers, within the same group and hence be able to harvest better winnings for their clients, than a passive index can.

Growth Stocks

Soon after the election of Donald Trump, everyone predicted a 3 – 3.5% economy, however despite low unemployment figures, the inflation is not moving and the US is still a 2% economy. Despite their average 100K plus job figures each quarter, the wage growth is just not there. And we all know, that stock prices don’t tell the whole story. And certain stocks, despite their positive revenue figures, like Wall Mart, have their stock price slashed. And it can be similar with the likes of Facebook, Apple, Amazon, Netflix and Google (FAANG). This brave new future, that everyone is postulating for is a lot of these momentum stocks, where you can have the same kind of pull back happening.

And then we have Tesla. Elon Musk showed off the first Tesla Model 3 vehicle and it is promising to be Apple in the cars industry with great opportunities. But aren’t they going to be impacted by component shortages, just like Apple was, i.e., with their shortage of their battery packs- the Tesla story is certainly a very interesting one, with capitalisations well above a lot companies with healthy revenue. And this, for a company which loses money with each care sold? And even if they did have the first mover’s advantage, which may not bear fruit. After all, the competition from Europe and China are not sleeping. This is what capitalism does, it knocks off the exceptional and levels the playing field. Therefore, a company that pioneers a certain market often has a limited time to bask in its first-mover advantage, before the competition sets in. Unless one can capture the users imagination and set up a trend. And one must admit Elon has done a fantastic job, in this respect. However, one mustn’t forget that the in this car industry where European rivals like Volkswagen, BMW and Austin Martins of this world are engaged, it will be difficult to sustain. Not mentioning a number of our Japanese competitors like Toyota and the new Chinese arrivals.

Dividend stocks

On the back of rising interest rates, there can be an opportunity for these stocks, because the interest rates may not rise as fast as what people think. The economic data out of the US is mixed at best and the FED has already signalled a very gradual rather than being more hawkish on the interest rates. There is simply not enough inflation in the US economy right now. With energy down 4 – 5% below USD 50 a barrel, last year. The dividend stocks get crushed when interest rates rise significantly, but we do not believe interest rates will rise significantly more this year, which is positive for dividend oriented stocks. On Pay-out, Jamie Dimon, CEO of JPMorgan, explained that, He would like to spend more time to grow the company organically and it is not the lack of capital that is hindering more loans. But if asked, “If I rather use the cash to buy back stock or grow the company, I’d say grow the company”. And some people think that banks are buying back stocks because they have no other ideas. He went on to explain the fact that “Loans are constrained by other factors and not right now by Capital” and he explained if a lot of things were different in the past 5 years he would have much rather put that money in use growing loans, in order to fund companies in need, in the American society rather than buying back stocks.” Jamie also believes that the US banks will go back to financing the economy and on the 8.8.2017 he mentioned that there can be a trillion USD more mortgage loans helping America to grow and in his belief, that’s where the government should be focusing and not the pay-outs.

Banks Lend Long and Borrow Short, hence steepening yield curve allows them to make a lot more money. With the flattening of the 10 year yields, it is obvious that the bank stocks would suffer. Earlier this year, Brian Moynihan of Bank of America pointed out towards technical flattening of the 10 and the 30 year yields. However, that as he said “This is technical” and does not alter the fact that as such the economic health of the country is still intact. As such, consequently banks whose main business is lending, like the regionals, will experience a flattening of their earnings. The story is quite different for the large banks, such as the Goldmans and Morgan Stanleys of this world. Although, all banks are providers of capital to the market and households, large banks are also engaged in other activities, like M&A, Wealth Management, Trade execution and last but not least Proprietary Trading, which although has taken a knock in the past years, is still a significant earnings revenue in their mix of activities. But some point towards the fact that trading with Fidelity and JP Morgan is virtually free. You have money managers under pressure. The financial stocks were trading at 2 x book value, i.e., at some historical lows (65% below S&P 500 average), towards the end of last year. As pointed out by the CEO of Credit Suisse, with such cheap valuations banks start to buy back their own shares.

Consumer Staples

The consumer staples brands, although being hammered by Amazon, might start peeling off their brands and start selling some of their business in the market place. Certainly the financials are going to be under pressure if interest rates don’t rise as much as some people think. But there are other opportunities out there. If the S&P 500 is close to all-time highs or close to its all-time highs that doesn’t mean that all 500 stocks have risen at the same rate or amount as the top performers like Apple and Tesla. And this doesn’t mean there are no other opportunities and that in particular again in the dividend space. Another pace, which has been beaten down significantly is Energy and although a lot of people have given up this space, there are a lot of opportunities out there with the likes of Chevron, Exxon, BP, BHP Billiton Royal Dutch Shell, Occidental petrol and Phillips 66, that are not only well run but are paying a descent amount of dividend for waiting.

The Bond Market

Is there a bubble in the bond market – Will there be a problem, when the FED normalises its balance sheet? Jamie Dimon doesn’t call it a bubble but as he said, however, he wouldn’t be putting money in the 10 year Sovereign debt, anywhere around the world. And the reason is simple, US alongside EU have gone to QE1, 2 and 3 and now everyone, led by the US is reversing it. And in our view the FED is doing the right thing, that is, raising the rates and telling all that they’ll be reducing the balance sheet. The likely outcome is that, it will be fine particularly when the American economy is doing well. Therefore, the FED’s action in the face of the economy, will not be that disruptive. Only caveat being that, folks out there have to be cautious. Here we want to point out that, it can give rise to volatilities simply because we’ve never had a reversals of this scale before. And when ECB starts the same program, no one can predict the future and our view is that you cannot make something certain that is not certain. That is perhaps why the comments out of the Chairman of the FED have been rather dovish, while monitoring the economic figures in detail. Janet Yellen, previous FED chairwoman warned the markets of the outstanding corporate debt and that it could be the next bubble for the markets. Having said that, the estimates go where the stocks follow. And where there is economic deceleration, stocks can set to become cheaper.

The big questions therefore, can Donald Trump deliver the promised tax reform, during his first term in the office? And the answer is that, it is critical that he does. The US economy cannot work if he doesn’t. And a lot of CEOs, who are engaged in a lot of capital expenditures are getting involved, in order to get the agenda forward and directly and indirectly they are creating 30 or 40 million jobs. The major initiatives are hoping that it will come rather sooner than later. Although, we are starting to get nervous about the economic growth under Trump’s administration, the fact is that the American economy is putting 150 million men and women to work every quarter. And it might be shocking to some, to understand that despite the GEO politics, sometimes and in spite of Washington that resiliency of the systems at work. Most people don’t go to work thinking about Washington. They go to work to put their kids to college, to put food on their table and stuff like that. Therefore, so what if some saying, is that the US is growing at 2%, in spite of that Gridlock.

One must also remember that the economy is not always synonymous with the markets. And the Valuations are terrible indicators of short term market performance, if you look at the earnings. If you look at the markets and that specifically at the International Loan Markets, they are trading at half their valuations, as the US Markets. Of course, no-one knows what’s going to happen in the next 3 to 4 months, with all those uncertainties out there. But if you look at the international markets, they do look to be oversold, relative to their valuations. This time it can be the FX crevice, which would be looming out there. Is the market under-pricing Risk, since the March of last year? At Swiss Wealth Solutions we are not sure. However, as a whole the market, we assume, knows more and believe it to be correct. Well, as they say, “No one knows, till everyone knows”.

And with the China talk, any agreement is going to be better than no agreement. And that specifically for the industrials and everyone else who has a large footprint in China. That is, the likes of Boeing, Starbucks, Tesla and even Dunkin’ Donuts. With the recent wage rises, coupled with some of the best numbers in the unemployment figures, it seems as if the US consumer has never had it better, in the recent US history. And knowing that close to 70% of the US economy is about the consumer, it paints a very bullish economy and the stock market. Last but not least, no one can deny that Chines consumer spending is also rising. It is therefore a mere matter of time when they will overtake the spending power enjoyed by the US consumer today. Therefore, looking at the sheer number of population out there, one can only be thinking of Goldilocks. Although, there may be some road blocks along the way.

The European Union

And finally, as far as Europe is concerned, there can be some idiosyncratic risks out there. Some of the balance sheets of the European banks are still bloated with non-performing loans. Hence, it might get in a situations where the government or the ECB might have to intervene. More importantly, however, if you look at the return on equity for European banks, it is starting to rise and we are seeing pretty steep slopes. Hence, in terms of Europe and the banking industry, we believe that the worst is over. This doesn’t, however, mean that there are no pitfalls out there. The main key to sustaining growth in Europe is the credit growth, most of which is coming from the banking industry. Therefore, the loan growth will be the fuel for the economy on this side of the pond. This is, in order to sustain expansion and the banks are well poised to deliver it here, only if it weren’t because of Brexit! And all this, rests on the shoulders of Mario Draghi and his resilience in leaving the interest rates unchanged. The recent rise in the US dollar, despite of the FED’s walk-back on the interest rates, provides a relief for Euro. However, if Euro were to appreciate against the US dollar, it can lead to detrimental results for the export industry in Europe.