Insight & Commentaries
Like it or not, debt negotiations and shutdowns are integral to the political process, recurring over the past 50 years. The fear of a budget impasse, shutdown, default, and debt downgrade has again gripped the markets. However, it is unlikely that lawmakers will allow a debt default, following instead a familiar pattern of bipartisan argument, brinksmanship, and, finally, compromise. While an outright U.S. government debt default is improbable, we should emphasize quality due to its numerous benefits. Durable, flexible, and predictable firms tend to fare better in uncertain times. In contrast, financially weak firms are more susceptible to government default…
Consistency is not flashy. Consistency does not take center stage. Consistency does not make headlines. Yet, consistency wins the day when predictability is in short supply, as it is now. With many observing that the recession risk is high, earnings could be at risk. Sales and profit margins for the S&P 500 companies are rolling over. Forecasted earnings trends are also headed down. Several high-profile companies that boasted stellar growth in 2020-2021 are falling flat. For this reason, we thought we should focus on consistency — one of the three pillars of our definition of “quality.” Consistency Defined When evaluating…
Surging inflation and interest rate expectations undermined stock and bond markets last year. There are nascent signs these trends may be reversing. Accordingly, stocks and bonds have rallied so far in 2023, despite the emergence of concerns in the banking sector. After a period of being slightly underweight equities, we have aligned tactical portfolio risk exposure close to benchmarks to reflect improvement in our WCA Barometer, coupled with a wide band of uncertainty around the forecast. Conquest portfolios
Index funds have gathered a devoted following since their debut in the 1970s. According to the Investment Company Institute, passive indexes and exchange-traded funds (ETFs) were 43% of the $29 trillion mutual fund industry. A main selling point of the funds is their “hands-off” nature, requiring little ongoing research or knowledge. But these funds are more active than you might think. While the funds do mirror an index’s composition, the index itself can change a lot. Those changes can be more significant than you think and introduce unwanted risks. Set and Forget Strategy An appeal of passive funds is their…
We believe a link exists between a business and its stock price. This is why we spend time thinking about businesses when building portfolios. If there was not a link it would be useless to spend time doing fundamental research. Considering the past five years’ volatile market environment, we thought now would be a good time to see if fundamentals, especially relating to quality, translated into differences in stock price performance. The Test (2018-2022) We set the stage by studying businesses and price performance from 2018-2022. From the onset, we gathered fundamental data on large U.S. companies by market value….
Quality companies grow when they make investments and expand profits. Other companies get in trouble when they make unprofitable investments. The whole idea behind investing in stocks (equity) is to grow. Fixed income is generally considered suitable for stable income; hence the name “fixed.” Long-run stock investing, by contrast, requires survival and profitable growth. Even though profitability alone does not guarantee the “best” investment in each year, focusing on high profitability is a good start because such companies are more likely to grow and create value, especially as funding costs rise. The Profitability-Value Nexus We are not saying that all…
We are starting to see some light at the end of the tunnel. The stock market is up for the year, inflation has begun to decelerate, and the labor market shows continued strength. These positive signals push back against the recession and inflation story that hung over markets for most of the past year. The improved backdrop is also reflected in our WCA Barometer (chart A, below). While the current forecast reading of 48 (the blue dotted line) is not robust, it is anticipating some stability and lift after a long downward slide. While the lift could prove fleeting, it…
With 2022 in the rearview mirror, we have hit the ground running, eager to shake off the previous year’s dour market mood. Despite the prospects of recession, persistent (albeit declining) inflation, and restrictive central bank policies, we see pockets of momentum and optimism in 2023, particularly in foreign developed markets. For the past decade, U.S. equities dominated and were the most sought after markets for risk assets. However, this situation is changing. Rising Returns One month into the New Year, we are seeing strong gains across the board in foreign markets. The following table provides local currency and USD returns…
High-quality stocks beat low-quality stocks in every problematic market for the past twenty years, but not in 2022 (table below). In each bearish phase, high quality held up better than low. However, this was not the case this year. Year-to-date, the WCA High-Quality index is down 15%, while the WCA Low-Quality index is down just 5%. While this trend is changing with recent performance once again favoring high quality (more on this below), this year’s performance of high-and-low quality needs some examination. High vs. Low-Quality Performance in Bad Markets Before doing so, we remind readers that quality is important but…
The International Monetary Fund delivered a sobering assessment of growth in their latest outlook. High inflation, war in Ukraine, and lingering supply issues are culprits. While credit spreads and earnings forecasts appear reasonably steady, our own assessment of data points to slowdown. As we look for signs of a turn, the weight of evidence points to some continued caution for now.
Last week, the European Central Bank (ECB) raised a red flag, saying some member banks have ignored warnings of risks associated with leveraged finance, according to Bloomberg News. The ECB hit a handful of European banks with capital charges in an attempt to encourage the banks to exercise greater caution. These actions come amid growing concern in Europe over a looming energy crisis, ongoing war in Ukraine, and struggles at some financial institutions. These pressures are evident in both confidence indicators like business confidence (graph A, below) and measures of financial stress (graph B, below). Graph A Graph B Rise…
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