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Apr 24 2019 
Global Stock Indexes Return to Previous Highs: What a Short Strange Trip It’s Been
The recent recovery in global stock prices has been astonishing and is of historic proportion. Investors would be very hard-pressed to recall a period when stock prices have ever made such a big percentage round trip – both down and back up – in such a short period of time. The reasons for the global sell-off have been well chronicled: Federal Reserve rate hikes, slowing economic growth and corporate profits, the US government shut down, and tariff wars to name a few. Though these were – and are – legitimate concerns, why have stock prices shrugged these risks off? Is this the beginning of another significant, multi-year leg higher for global equity prices? Maybe.
One thing we know for sure is that stock markets serve as a discount mechanism to future events. Stocks have an uncanny way of rising just ahead of better news or falling prior to the darkest part of dawn. That is why it is often best to buy stocks when the economy is at its worst – or when the list of worries is as long as it was during the first quarter. The other thing I know about stock prices is that shorter-term movements – months, not years – are often driven by investor psychology – not necessarily fundamentals.
Fear and greed can move stock prices quite significantly in both directions, as we have seen in the past six months. Is the recent volatility, both up and down, a sign that the market is discounting better news about the economy going forward? Or is it just a massive bout of investor fear and greed? I would suggest a bit of both, which means we should be careful but more opportunistic during any upcoming market corrections and put the odds in your favor for a good year of investment performance.
It is pretty easy in hindsight to look back over the past three months of this recovery and think that only a fool would have been cautious during such a period. I tend to take a more “safe than sorry approach” when the key pillars of stock market strength – economic growth and corporate profits – look as vulnerable as they have in the past six months. Often times “cracks” in these important pillars bring on treacherous bear markets and catastrophic declines (40-50%) in stock prices – i.e. 2001, 2008. These types of bear markets occur about every 9-10 years and can ruin a healthy financial/wealth plan or an endowment’s spending policy. Investors would be wise to keep that statistic in mind, should one think that risk management is a fool’s game.
As you know, you have had less stock exposure than normal during this period to mitigate the potential of a further slide in stock prices. This more cautious stance (less stock) has temporarily muted your upside. However, the difference between your return and the market would be easily rectified if we had a normal market correction of 7-9% which is – in my opinion, and that of other bright investment experts – way overdue.
The laundry list of worries that we faced at year’s end has dissipated. The Federal Reserve has made a key pivot to be more accommodating while the economy looks to have slowed, but maybe stabilizing at the current lower growth rate of 1.5-2% annually. This, in turn, may allow corporate profits to meet already lowered expectations. You can make great profits in a slower-growing economy by tilting your portfolio to companies that can deliver consistent growth.
Given the fact that things look a bit brighter, you should continue to add stock where you see great value. If we do experience the way overdue, much anticipated, normal market correction you should most likely speed up such purchases to get your portfolio more in line with market returns.
Though one might be tempted to add back any missing stock exposure now, or within days, I would suggest a more patient approach to yield the best returns over the longer term. If the economy is truly on a slower, but solid growth path, there will be better opportunities over the coming weeks and months to be fully invested.
Though the skies appear to be a bit brighter and the clouds are dissipating, we are in the thick of corporate profit reporting for the first quarter. This may bring some disappointments and a return to volatility on the downside. Should profits and economic data experience a further decline, we will continue to manage this risk by adjusting your portfolio’s allocation to stocks, your sector exposure and the use of carefully placed stop-loss orders.
The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.
This book walks you through the basics and best practices of what you need to know to be successful.
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Apr 01 2019 
Patient and Value Conscious: Upcoming Data Should Align Stock Prices and the Economy
Long-term investment success often requires short-term periods of patience, restraint and being value-conscious. In today’s fast-paced, short-term performance, the digitally-driven world this can be a challenging combination. However, the discipline to step away from short-term “noise” and carefully examine the “forest” as opposed to the “trees” can result in significantly better long-term returns. This can often mean going against the crowd in the face of a falling or rising market.
Years ago I learned that short-term movements in equity markets are driven by psychology, but long-term trends are driven by economic and corporate profit growth. This comes to mind during the past few months as I witnessed the dichotomy of sharply rising stock prices in the face of declining economic growth and corporate profits. Investors need to ask at this point which of the two – the recent direction of stock prices (up) or corporate profits (down) – has greater longevity? And, how will this play out over the next few months and the balance of the year?
In just a few weeks, stock prices appear to have lost their momentum. In fact, for most of March, global stock indexes were in the red. At the same time, economic statistics and corporate profit reports have continued to deteriorate. Perhaps the long-term fundamentals are beginning to trump short-term psychology? I believe that this may be the case. The bond market, which has historically been the best predictor of such things, appears to agree.
This is evidenced by the bond market’s recent yield curve inversion – short-term yields higher than long-term yields. This unusual phenomenon often precedes weaker economic data and profits. A bit more time, along with earnings and economic data in April, should bring the disparity between stock prices and underlying fundamentals back in line.
We faced the beginning of a bear market in the fourth quarter of 2018 with most indexes down 20% and many sectors down much more. Though we don’t predict Armageddon for the global economy or stock market, we also do not believe that a real bull market can begin again without at least a normal correction or perhaps something worse. We may be on the precipice of such a move given that the market has lost its momentum and we are heading into what is likely to be a dismal period of earnings reports and economic statistics from the first quarter when the US Government was shut down. For that reason, we continue to be a bit more defensive than your normal, fully invested portfolio.
I suggest you continue to search for and take advantage of isolated opportunities in companies that represent great value regardless of the market’s direction. These are difficult to find and, given the overall market environment, the pace of adding significant exposure has been slow.
It is always difficult to predict with accuracy the direction of stock prices, but one simple rule holds true: When the economy and corporate profits are rising, stocks do great! That has just not been the case over the past 4 months, which poses a risk to investors. As a reminder to anyone who has experienced a normal bear market, stocks typically fall before the bad news about profits as happened in October – and then have sporadic, often significant, advances as we’ve seen recently – only to decline again into poor earnings reports.
Though global stocks historically decline approximately 40% during an average bear market, I am not predicting such an outcome. In fact, be ready to become more growth-oriented as soon as stock prices and earnings growth are more aligned – most likely when stock prices are lower and most of the bad news about profit growth has been digested. I wouldn’t be surprised to see this come to fruition in the next few months.
After decades of managing money, I have experienced a number of these short-term periods of being less invested and they have proven to be a bit trying in the middle, but valuable in the end. None of those past periods lasted more than months and I don’t expect this period to be an exception.
Write caption… The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.
This book walks you through the basics and best practices of what you need to know to be successful.
