Posts Tagged "Kevin Caron CFA"
As we start the fourth quarter, the major U.S. stock market averages hover around a 0% return for the year. That unexciting performance masks extraordinary volatility — a 35% February-March decline and a 50% March-August bounce back. Other assets demonstrated similar volatility (graph, next page). Through September 30, Long-term U.S. Treasury bonds returned over 20%, and Bloomberg Barclays Aggregate U.S. Bond Index returned 6.5%. Short-term T-Bills returned about 0.7%, and gold is up 24%. Volatility again ruled the roost in 2020, and diversified portfolios generally did better than all stock portfolios. As we head into the final quarter of 2020,…
Imagine an investment strategy wherein you might seek out the most successful and valuable companies. We will refer to this as the “big five” portfolio. Further, imagine that this “big five” portfolio bought the five most valuable companies in the Standard & Poor’s 500 index at each year’s end starting in 2000. Imagine further that this process was repeated each year ever since. How might this strategy of buying big and valuable stocks have done? The strategy produced positive returns, but the journey would have been painful and frustrating (chart A, below). Investing in the “big five” at the start…
Even though stocks should rise over time, we think the pace of the market rally is set to slow because extraordinary government supports for the economy are set to fade, and valuations have run ahead of fundamentals. Changing Tack It is hard to bet against stocks for the long-term. Since the 1920s, stocks have produced a positive return every 20 years based on S&P 500 annual returns. Stocks tend to beat bonds and cash over time, supporting the idea that markets tend to reward risk. But this fact obscures the reality that stock investing also involves periodic drops. Not everyone…
We continue to see improvement in several indicators from a very weak second quarter. It is likely that, after a 30% annualized drop in GDP in Q2, Q3 could see a 25% annualized rebound. Progress is also seen in weekly data such as the Federal Reserve Bank of New York’s Weekly Economic Index (WEI). This index tracks ten daily and weekly indicators of real economic activity scaled to align with the four-quarter GDP growth rate (Chart A, below). The WEI spotlights consumer behavior, the labor market, and production weekly. As beauty is in the eye of the beholder, so too…
It is hard to conclude almost anything with certainty amid this pandemic. Are schools open? Or closed? Or half-open and half-closed? There seems to be less unanimity in Congress on policy issues. The size of continued supplemental unemployment benefits was at issue before this weekend’s executive order. Republicans favored a $200 additional benefit, and Democrats wanted $600. President Trump’s $400 figure falls neatly in the middle of the $200-$600 range, but questions over the order and funding for the order remain. The “muddled middle” will have to suffice for now, but, by comparison, today’s situation is far better than where…
Negotiations over a second stimulus round are underway, ahead of Congress’ early-August recess. News reports suggest President Trump’s team may be looking for a $1 trillion package focused on payroll deductions and support for unemployed workers that does not create “disincentives” for returning to work. By contrast, the House of Representatives advanced the $3 trillion HEROES bill in May. That bill seeks more significant direct cash payments to individuals, aid for states, and other measures. The GOP is expected to release details of its plan over the next few days. Whatever the final number, this will likely be the last…
Executive Summary: The second quarter brought a surge in stock values predicated on three critical assumptions. First, fiscal and monetary measures would be sufficient to support an economy suffering a tremendous hit. Next, the economy could begin a process of “reopening” and avoid a second wave pandemic shutdown. Finally, progress will be forthcoming toward a treatment or vaccine for COVID-19. While the future could always play out differently than expectations, equity markets seemed willing to focus on positives, rather than lingering unknowns, throughout most of the second quarter.
The second quarter saw stocks roar back from March losses. Global shares rose 38%, and high yield corporate bonds rose 20%. Long-term Treasury bonds were flat, and gold was up 15% (chart, below). The rally began after global stocks fell by one third from February 19 through March 23 as COVID-19 spread outside China, and shutdowns began. Since March 23, markets focused on measures taken to deal with the pandemic and its effects on the economy. A $2.2 trillion stimulus package and extraordinary central bank actions triumphed over fear and uncertainty. Volatility reigned throughout the first half of this year….
This week closes out a most volatile quarter. Stocks are on track to rise by the most during the quarter (+19% as of this writing) since 2009 despite a sharp contraction in the economy. The powerful rally leaves many wondering about valuations amid a pandemic and recession. Even though price is important, we should avoid relying too heavily on standard valuation metrics such as price-to-earnings multiples because this economy is far too volatile to assess business prospects accurately and because stock values are determined mostly by long-run, rather than short-run, earnings power. Price is Important Overpaying for stocks can take…
A significant shift in financial markets occurred roughly twenty years ago. It was June 2000, and Federal Reserve Chairman Alan Greenspan had just raised the short-term interest rate to 6.5%. Within months, a falling stock market would lead the economy into a short and shallow recession. Unbeknownst to anyone at that time, the central bank would soon begin cutting rates further than they ever had before. In so doing, they would usher in a new era of easy credit. In this commentary, we make a case for investing in quality, especially during this ultra-easy credit era. Why do we call…
Last Monday, the National Bureau of Economic Research declared the longest economic expansion in U.S. history over. After beginning in June 2009, the expansion lasted for 128 months through February. Born in the depths of a severe financial crisis that started at home, many worried the U.S. would suffer a long decline. In the ten and one-half years that followed, the U.S. economy and markets outpaced most others, leaving domestic stocks with premium valuations. Even though U.S. stocks appear relatively expensive, we should remain tactically overweight domestic assets for now because dollar-denominated assets can convey significant benefits during times of…
The stock market is up over 40% from the March 23 bottom. This spectacular 50-day rise bookends the 33% market drop from mid-February to the March bottom. Overall, the S&P 500 moved by more than 70% in a little over three months, leaving many investors bewildered. But recent market action implies that most traders are expecting conditions to improve from here. Stimulus measures, reopening the economy, and hopes for a virus vaccine or treatment are all part of the recovery scenario. In this week’s commentary, we look at what is driving the case for both bears and bulls. We also…
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