2018 Market Mid-Year Outlook (July 1st, 2018)
Key items you need to know:
- It’s Mid-Year 2018 and its been quite a wild ride. I predicted that the Patriots would win the Super Bowl, but that was before I thought my Eagles would get there. It was a year of underdogs and like the Eagles there have been some underdogs that deserve noting. There are about 5-10 stocks that get most of the air time on CNBC, FOX and Bloomberg which are now providing stories on them that have nothing to do with “news” that they created that day. They flash their name and symbol on the screen and feel people will watch, even know there is no news. Same with Bitcoin! How many people do you know that own Bitcoin? Now look how much airtime its getting, especially on CNBC. So much for news, they know entertainment sells advertisements. This is being brought to your attention because there are many other companies and specifically sectors that need more attention and airtime. As you know we are in favor of using ETFs over Mutual Funds for sectors and market indexes to spread out risk for your portfolio. Look at the underdog areas for BETA catchup (equal too the market move) and ALPHA (better returns than the market). Also, as we have mentioned in many newsletters, please filter out the “noise”. Focus on “news” and “facts” and ignore the noise. First, its not healthy, second it is a waste of time and third, it is distracting to the items and areas that deserve your time and attention. We will discuss areas that you should be paying attention too that deserves your time and attention for investing and peace of mind.
- Telecom and Media Sector. Usually these companies pay a healthy dividend 3%+ but haven’t had the sex appeal as some of the other areas of the market. In a second half that may be looking for more stability and dividend payers, this may be a good area to consider.
- Robotics and Artificial Intelligence. Even though we have seen some successes in this area, it is still in the early stages. If you look at the market as a 9-inning game from early adopters to a very mature market, we are probably only in the 1st or 2nd inning. This is not a 1-3 year plan, but 20-30 year plan with consistent reinvestments.
- Cybersecurity. Most of you know that I’ve been building positions for clients since 2015, but after a dip in this sector, it has roared back stronger than ever in the last 12 – 18 months. With all the Russian collusion talk, North Korea hack on Sony and Wikileaks hack on the DNC, you know that as the 2018 mid-term elections heat up and the 2020 Presidential Election lurking around the corner, you know that cybersecurity will be top of mind.
- Payment Market – On-line and electronic payment processors are doing well and will continue to do well. People are using (and carrying) less cash in their pockets and utilizing on-line and electronic payment processors.
- Trade and Tariffs. Again, this newsletter is not political and never will be. If you have never owned a business or worked in a business that has been involved with international transactions, you don’t realize how bad its been for decades, yes decades. Multiple Presidential administrations has essentially barked loudly about it but truly no bite and efforts have been nothing more than anemic. We are not saying the approach of this administration is the best, but at least we are standing up and telling them we won’t tolerate either their high and unnecessary tariffs on select goods or delays in processing imports that are perishable goods once it reaches their countries. Net result and timing; The Chinese and many of the countries including Mexico needs us much more than we need them. I don’t think that we are strong arming them considering that those countries and many more have been taking advantage of us for many years. Consider this, it will be short-term pain and long-term gain and the administration needs a result before 2020 and the other countries know this. How do they get resolution, keep choking them with higher tariffs on goods they need until they yield, but do it slowly. The Chinese especially are very proud people and this administration knows it. When there is a resolution, we cannot declare victory, but demonstrate a win-win scenario and it will/should be done in a magnanimous way. If there is are good compromises to all the trade disputes, the market will move upward 5%-10% within a 1-3 month period of time. If the administration decides to be braggadocious about the trade deals as they won, it could be a major problem moving forward. Those countries that “lose face” by that bluster will find a way to make us pay at some point. Of course, best case scenario is no trade tariffs on either side for truly, free and fair trade. Nobody wins a trade war and many times, if prolonged, it has lead to real war. History always has a way of repeating itself.
- Yield Curve. The yield curve has always included the 2-year, 10-year and the 30-year. A normal yield curve look like a line that goes from the lower-left of a chart and circle-curve Up and to the upper-right of the charge. Meaning, the 2-year is less than the 10-year and the 10-year and less than the 30-year. The yield curve has been flattening and if/when it gets “inverted”, that typically signals a recession in 18-24 months. The “inverted yield curve” essentially means that there is more appetite to secure money in the short-term as the medium and long-term is much more uncertain and institutions and investors would rather park their money in shorter-term assets as they take money off the table in equities (stocks, ETFs) and become much more conservative. Pay attention to the yield curve!
- IPO market is strong. IPO (Initial Public Offerings) of companies going public are strong and have begun to accelerate. Companies typically like to go public in strong markets and like the outlook of the markets in general. This is a positive sign for a bull market over the next 18-24 months.
- Outlook for Balance of 2018. We should get our first indication of the 2nd half outlook by end of July when most of the S&P 500 companies report 2nd Quarter corporate earnings and provide earnings guidance. They should also give investors a sense of how the corporate tax break will help them and if there will be any raises in dividends, share buybacks and corporate re-repatriation of international cash hoards. All positive news in those areas will be rocket fuel added to the market. As long as the Trade Dispute is escalated slowly (or resolved harmoniously), we should see the S&P 500 approach 3,000 and as high as 3,100. One major wrinkle could spoil the receipt for an of year bull run, if there is no proof of denuclearization and its is proven that they have “escalated” their efforts, that will be major headwinds for the markets.
Well, as we finish the first half of the year, looking back, not a lot happened. A lot of volatility and nothing happened. So why, you ask? There are some pundits that will tell you that the volatility was caused by institutional rebalancing their portfolios. Or, corporate earnings didn’t look good after the first quarter. Or, there were major shifts from growth to value securities. SO, why did the techs perform well and the value securities didn’t?
The straight forward answer is, “no one knows why”.
Major corporations are buying their stock back as well as raising dividends, mostly due to the tax cuts finally taking place, AND, business is picking up. A recent report out of Washington says that there are more jobs available than candidates. (if you believe reports out of Washington)
have proven records of dividend increases and steady long term growth. Money sitting on the sideline should be invested, maintain a cash position of 3-5%.
Senior Portfolio Manager
Remember, this article and commentary is not “advice” or any form of a “recommendation”, just opinion and information to consider. Your feedback is always welcomed. Feel free to pass this email along to a friend, family member or colleague. If you don’t want to receive these periodic updates, let us know.