Eq: Total Market
December was the worst month for stocks since the Financial Crisis. It was a bleak for almost all investors. Then something magical happened—we just had the best January in thirty years. Forget the shutdown and the polar vortex, the S&P 500 rose a whopping 7.9% in the month. Banks and smaller companies did particularly well, outpacing the broader market. The market has been calmed by much more soothing language from the Fed, which has lessened fears about a recession.
FINSUM: What a month it was for stocks! We think the market had a very healthy correction which put earnings multiples back into a reasonable place, and there is a much better runway from here.
BAML has put out a report chronicling a new outlook for stocks, and it isn’t pretty. The report shows that investors have the worst views on the markets in a decade. Investors are pessimistic about global growth and corporate profits, the combination of which makes them expect a weak equity market. Here is a summary of Bank of America’s report: “A poll of asset managers showed a net 60 per cent of those questioned think growth in gross domestic product will weaken over the next 12 months, the worst outlook on the global economy since July 2008 and below the trough in January 2001”.
FINSUM: So it is important to note that these are asset manager opinions, not individual investors. Accordingly, it may not be as much of a contrarian indicator as usual.
Climate change risk has slowly but surely crept into the consciousness of even the most mainstream investors. As its prominence has risen, so too has its ability to impact share prices. With that in mind, here are some of the individual shares most vulnerable to such risk. The names are not what you would expect. For instance, Norwegian Cruise Lines and Royal Caribbean Cruises, along with pharma companies Merck and Bristol-Myers-Squibb were identified as the most at risk. “There are many ways to measure how climate change affects your portfolio. One is to see how the physical facilities of the S&P 500’s constituent companies are affected by hurricanes, sea-level rise, and heat stress”, says Barron’s. One head of ESG commented on the list that “you’re exposed” no matter where a company has its headquarters”.
FINSUM: Norwegian is most exposed because it has so many facilities in Miami, where the risk of rising sea levels is very high. Sorting out these risks is a major challenge and it would behoove advisors to seek out the main data providers for such risk, like Four Twenty Seven.
With the market still facing some volatility after last month’s beating, some investors might be inclined to seek out stocks that may stay relatively safe from big moves. One strategy for doing so could be to look for companies with low debt. Low debt brings greater financial flexibility to companies and generally makes investors much less worried about their ability to meet their obligations. According to Barron’s “Stocks of firms with low debt have outperformed those with higher debt by about one percentage point a year for the past 25 years … Low debt companies are also less volatile than the overall market, on average”.
FINSUM: This seems like a good parameter by which to carve out a safer portion of a portfolio, though as our readers will know, we generally don’t like using historical returns alone as a guide.
Ford reported earnings this week, and they speak not only to its own weakness, but to the headwinds facing the US car industry. Full year 2018 earnings declined considerably from the previous year on weak North American sales, as well as a poor performance in Europe and China. Ford’s CEO continues to promise that plans for a major restructuring will be released soon, but as yet, investors have been given little more than promises for change.
FINSUM: Ford is hurting worse than GM, but both companies are facing product lineups that are mismatched to current customer demand, which means the next couple of years are going to be challenging.
Markets are doing well this year, but there is a lot for investors to worry about. Aside from the current ongoing shutdown, there is a debt ceiling deadline on March 1st (which is sure to be another political nightmare, and may yet intersect with the shutdown), a deadline for a Chinese trade deal, and a scheduled Brexit on March 29th. That is a lot of potential crises on the calendar. However, valuations have fallen considerably alongside share price falls and P/E declines, and the market seems to be regaining its optimistic footing. Corporate earnings look to stay strong in 2019, which will help support the market.
FINSUM: There are a lot of analysts who think this is a bear market bounce, and many others who think the worst is behind us. We are starting to side with the optimists.