Super User

Super User

Wednesday, 20 May 2020 04:53

Buckle up Butter cup

Choppy waters ahead:

Coronavirus epidemic caught most of us off guard. It is a black swan event or exogenous effect on the global economy. Markets were flying high in the first 45 days of the years and had severe 35% correction in thirty-three days.  

Immediately Federal Reserve slashed the short-term rate by 100 basis points to 0-0.25% and planned to buy $700 billion of bonds. The Federal Reserve has offered more than $3 trillion in loans and asset purchases in recent weeks to stop the US financial system from seizing up. Federal Reserve might consider controlling the yield curve under which Fed pledges to buy unlimited volumes of the treasuries to keep the 10-year yield below 1 percent.

On March 27th, Congress passed a massive Corona relief package for individuals, small businesses, and big corporations. Congress has approved more than $2.6 trillion in several economic assistance. Both expansionary fiscal policy and easy monetary policy gave confidence to the markets.

By May 19th, 2020 (as of today), markets recovered most of the losses and down only 8% year to date, probably one of the quickest rebounds in the near history.

Unfortunately, the coronavirus lockdown has pummeled the US economy, with over 30 million job losses and trillions of dollars of output and loss of wealth. Real gross domestic product (GDP) decreased at an annual rate of 4.8 percent in the first quarter of 2020. The decline in GDP is the first since 2014 and the worst quarterly contraction since 2008.

GDP change

This quarterly annualized growth rate was significantly lower than the +2.1 percent growth rate reported in Q4 2019. It is expected a much deeper contraction of between -38.8 and -43.7 percent (annualized) in Q2. The growth forecasts for Q3 and Q4 are also profoundly ambiguous and will depend on new infection rates, treatment options, testing availability, and government policies.

 

imf projections

The International Monetary Fund (IMF) released its latest World Economic Outlook in early April with substantial changes to its global projections due to COVID-19. After expanding an estimated 2.9% in 2019, Global GDP expected to contract by 3.0% in 2020 and then rebound in 2021 with a 5.8% expansion. This forecast is significantly different from the IMF’s interim projections published in January.

The IMF is projecting massive economic contractions in developed countries in 2020. The US economy expected to decline by 5.9%, the Eurozone by 7.5%, and the UK by 6.5%. At the same time, emerging countries such as China and India will grow at much lower growth rates than these nations have seen in recent years. China expected to grow by just 1.2% compared to 6.1% in 2019, while India will grow by only 1.9% following a 4.2% expansion last year.

The IMF is predicting that the global economy will experience its worst recession since the Great Depression, much worse than what we saw ten years ago with the global financial crisis.     

Deflation ahead?

CP42020

Despite the lower interest rates and massive fiscal spending, there are no signs of inflation, due to sluggish spending by consumers and cost-conscious corporations.

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.8 percent in April on a seasonally adjusted basis, the most significant monthly decline since December 2008. A 20.6-percent decline in the gasoline index was the most significant contributor to the monthly decrease. The indexes for apparel, motor vehicle insurance, airline fares, and lodging away from home all fell sharply.

The 12-month percent change of CPI ending April for all items was 0.3%. In the past 12 months, prices for food, shelter, and medical services increased by 3.5%, 2.6%, and 5.8%, respectively. Energy (Gasoline), Apparel, and Airline fares declined by 32%, 5.7%, and 24.3%, respectively.

Leading economic indicators

Leading economic indicators show potential signs of change before economies show any material changes in their headline lagging indicators.  An increase in the leading economic index is a sign of future economic expansion, and a drop in the leading index, obviously an indication of future economic troubles. Historically the leading economic indicators gave clear signals when the economy is changing its course.

Globally Japan, UK, and German, leading Indicators were showing weakness since late last year. Now, these leading indicators abruptly changed the direction to lower in both developing countries like China and India to developed countries like the US and EU areas.

LEI2020Apr

Leading Economic Index ® (LEI) for the US declined 6.7 percent in March to 104.2 (2016 = 100), following a 0.2 percent decrease in February, and a 0.4 percent increase in January, which is the most significant decline in its 60-year history. The sudden deterioration of LEI was due to unprecedented initial unemployment insurance claims and a drop in March stock prices. However, markets are under the illusion(false) and recovering rapidly. The leading data and market reactions are quite the opposite of each other.

Cash is King

Once the legendary investor Warren Buffett famously said, ‘It’s only when the tide goes out that you will learn who has been swimming naked”.  During the economic distress period, debt-laden companies go bankrupt and strong firms only survive.

The entire airline industry is in trouble, almost all the airline companies except for Southwest showing signs of weakness. American Airlines has only 30 days of cash on its balance sheet by the end of March. It is a clear sign to get into bankruptcy. Companies like JC Penney, Neiman Marcus may not survive. Several upstream companies in the energy sector are deep in debt; persistent lower oil prices, many of them going to get bankrupt soon.

Outlook:

Recent market recovery does not reflect the underlying economy. Expect much severe market price adjustments when the analysts and pundits realize the forthcoming numbers do not match their expectations. The Coronavirus profoundly changed how we live and how we spend. Movies theaters, restaurants, apparel, Cruises, and amusement parks are struggling to survive.

General merchandise, wholesale clubs, e-commerce, online grocers, food delivery, streaming, and gaming companies will thrive in this lockdown or semi-free environment. The business will not be usual for an extended period, assuming both fiscal and monetary policies do not change their course until we see the signs of economic progress. Until the signs of growth appear, it is good to stay defensive by holding liquid assets and defensive stocks.

 

 

 

 

 

Thursday, 18 July 2019 20:38

Market outlook Third Quarter 2019

Lakeland Wealth Management

It is already the second half of the year; markets rebounded nicely from the last year-end correction. When markets bounce, they do quickly, patience, and long-term view on the investments are essential when we invest in the stock market. The latest bull market is the longest in history started in March 2009 and completed a decade and moving forward, while unemployment is historically low; inflation is still below the Fed’s target 2 percent rate. Market critics were skeptical about the resilience of the markets since the beginning of the turnaround; still many could not digest the continued economic expansion. Once the legendary investor John Templeton said: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

The market is now at the matured stage and clearly showing the aging factor. The second quarter of 2019 is the peak earning quarter, and we should start seeing a decline in the earnings in the coming months. That is the nature of the economy, economic slowdown already started partly because of the global trade and supply chain issues, but the growth is still positive. That does not mean the market expansion is going to end abruptly. As with changes in the economy, our asset allocation has been drifting from equities to fixed income assets. However, we are still overweight in stocks to take advantage of continued economic expansion.

Historical Interest ratesp1

Since Federal Reserve raising interest rates since the beginning of 2016, the bond returns were abysmal, but that trend might change going forward. Federal Reserve indicated more accommodative policy in the June meeting, and willing to cut the interest rates in the coming months due to uncertainty around the trade war with China and the slowing global economic trends. Interest rates in most parts of Europe and Japan are in negative territory. Major economies like China, Japan, Australia, European Union, Brazil, and Argentina already in the path of easing their monetary policies, which some many economists in the US see as a competitive disadvantage.

p2

In general, higher interest rates keep the currency valuations higher; thereby, US exports can be expensive to our trading partners or lower foreign currencies keep import costs more economical, thus higher trade deficits. Skirmish trade issues and along with tepid inflation are the primary concerns to the FED which we see another reason to cut its interest rates anywhere from 25 basis points to 50 in the upcoming July meeting. Alternatively, they may spread the 50 basis points rate cuts from July to September meetings. Expect lower bank interest rates as much as 50 basis points (0.5%) and a further drop in both 15 year and 30-year mortgage rates.

p3

Yield-Curve: In the late first quarter, inversion of the US yield curve spooked many and got a lot of media attention. When long-term interest rates fall below short-term rates (3 months), it is known as yield inversion. Financial institutions borrow at the short end of the yield curve and lend based on 10-year bond yield. During the inverted yield curve times, financial institutions have less incentive to lend funds. However, the recent Fed announcement of the easy monetary policy shifted lower end of the interest rates below the 10-year rate. With both expansionary Monetary policy (lower rates) and expansionary Fiscal policies (Budget deficits), the future state of the yield curve would be upward sloping, and we believe the economy will keep humming for the next year.

Lower rates mean lower cost of capital (corporations pay less on the debt), prolonged lower rates are good for the stock prices. For the past decade, the nominal GDP grown more 50%, personal consumption makes up three-fourths of the GDP contributor. So far, the household balance sheet is in great shape; consumer confidence is all-time high; unemployment is the lowest point; household savings rate is in the upward trend at six percent, and the wage growth trend is positive. Relative earnings yield from the stocks is a lot higher compared to bond yields. All the signs are pointing to further market expansion for the year 2019.

Sreeni Meka

July 18, 2019

 

 

 

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Check my opinion on the LinkedIn site during the December market meltdown.

Adding Alternative Investments to Your Portfolio (US NEW Article)

By Ellen Chang, Contributor April 15, 2019, at 2:08 p.m.

ALTERNATIVE INVESTMENTS are often used by investors to hedge against volatility and add diversification to their portfolio. Investments other than traditional ones, such as stocks and bonds, are known as alternative investments. These types of investments can include commodities, precious metals, real estate, startups, options, hedge funds, private equity, venture capital, and cryptocurrency.

The principal differences between traditional and alternative investments are liquidity and return rates, says Sreeni Meka, a portfolio manager at Interactive Advisors, a Boston online investing company. The most significant benefit for adding alternative investments is diversification since these assets provide hedges against inflation and have a low correlation to the stock market. "We would recommend some exposure to alternative investments such as real estate than other alternatives like precious metals to attain the diversification in the portfolio," he says. "The amount of real estate exposure always depends on how much a client can bear the volatility of their portfolio and the stage of life."

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