The Investment House Commentary
El Nino and La Nina
Recent weather patterns in the Northern and Western Hemispheres have given rise to discussions about El Nino, and how the periodic warming of the ocean’s surface can produce extreme climactic conditions thousands of miles away. Its companion effect, La Nina, likewise causes climactic changes with corresponding cooling of the ocean’s surface temperature.
In the past quarter, the violent movement of asset markets – commodities, foreign currencies, and equities, have likewise provoked great discussion as to their sources – Fed policy, China’s slowing growth, what could it possibly be?
While there is no way to answer such questions definitely, it is certainly worth noting that forward profit expectations for the next 12 months have turned down for the first time in 6 years. To read the entire report: The Investment House Quarterly Q3 2015
The Price Is Right. Isn’t It?
Long time investors know well the old saw that the equity market has risen, on average, about 9% per annum over a number of years (8.91% over the last 20 years, to be exact, according to Morningstar). But as we have often pointed out, such a ride is not necessarily a smooth one. Many wide fluctuations of 30% and more in either direction are contained within that quiet, well-behaved term “average.”
So too with individual stocks, even over as short a period as one year. This week’s reaction to Google’s earnings announcement is a case in point. As the chart below shows, over most of the last year, Google stock hovered quietly between $500 and $600 per share – a range of about 20% – and for much of the time, traded right in the middle of that range, around $550. Until last week. Then, suddenly, in one day, a company with over $400 billion in market cap gained over 16%, and in only one trading week, gained over 25%! To read the entire report: The Investment House Quarterly Q2 2015
Does the future of the economy matter to investment returns?
Many managers, in an attempt to quiet the understandable fears of their clients, reply,
“In the long run, everything will work out,” – or something akin to it. They cite the average positive returns to stocks over a long period of time, note that even the sharpest market drops have eventually been not only recovered, but exceeded, and counsel not to worry.
Our answer is somewhat different: Of course the economy matters!
The problem is not that the direction of the economy does not matter to investment results, but that 1) it is nearly impossible to predict the short term direction of the economy with any accuracy, and that 2) investment returns are often completely uncorrelated with the actual state of the current economy, as markets attempt to look into the future and discount future expected returns. So that, even if we could predict the trajectory of the economy, it would be very nearly impossible to predict the trajectory of stock market returns. To read the entire report: The Investment House Quarterly 1Q15
“The Good Times Are Over”
Let’s Make A Deal
As the new year began, one of the financial media’s most frequently quoted talking heads – bond investor Bill Gross – opined that, due to the dampening effects of zero interest rates, and their cumulative negative effects on asset returns as supply of productive assets is so easily financed, “at some future Ides of March or May or November 2015, asset returns in many categories may turn negative…The time for risk taking has passed.”
On the other hand, as Barron’s pointed out a week later (Jan 12, 2015 issue), data compiled by Wharton Professor Jeremy Siegel suggests 5 year average returns which fall into the negative are exceedingly rare, with the worst such period having encompassed the Great Depression, and virtually no 15 year periods having shown a loss. The persistence of such five year returns is remarkably invariant to yearly economic growth, with median five year equity returns averaging 9.5% since 1871.
One of the things which is so frustrating about such conflicting data and opinions is that, often, on the surface, both propositions seem quite plausible. To read the entire report: The Investment House Quarterly Q4 14
Will The Real NASDAQ Please Stand Up…
As 2013 neared a close, the beloved Nasdaq Composite index crossed the 4000 mark for the first time since the early days of 1999 – the very height of the “tech bubble” of the last century. As everyone painfully recalls, that bubble went on to burst within the year, wiping out more that 80% of the index’s prior peak valuation. As the Composite recently regained its old heights, the questions of history return: Will the same thing happen now? Are we currently in the same kind of bubble? To read the entire report:The Investment House Quarterly Q3 14