The polls have not had an effect on the markets so far this election the best that I can tell, so I expect either candidate is ok for the market. This might be the only redeeming quality I can find so far for this highly emotional and nasty election. Eight years ago when Obama took the nomination away from Hillary in early June, 2008 the market that month fell almost 9%, which immediately set off a series of events that ended up poorly as we might remember. I am one of the few people that attribute the beginnings of the horrific market selloff, the Great Recession, to the uncertainty of an Obama Presidency. Markets do not like uncertainty as most of us know. Of course something can happen at any moment to cause the market to stop ignoring the polls. Regardless, I suspect whoever wins will inherit a bear market before the end of their initial term. We will be overdue.
With the markets at or near all time highs, we do see some speculation returning. This of course is a good and a bad sign. ‘There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can’, to correctly quote Mark Twain. Buyers are itching to get in, and we have seen them adding to their holdings on pullbacks. They don’t want to be left further behind! While the market is likely ahead of itself in the short term, it is not significantly overvalued, especially if earnings trend ahead of expectations. We remain committed stock market investors, yet expect to be holding more cash (potentially) if the markets continue this run.
You may know, I’m not a fan of corporations buying back their shares but they continue to do so aggressively. Maybe you can say that with the market at all time highs, this has been a good use of cash. Money is cheap to borrow, and companies appease the analysts spending cash on buybacks. These analysts, crazy as it sounds, often do not personally own shares of the companies they follow. Just know that when the next recession arrives, some of this will unravel, and the stock and bond markets could experience high volatility. We saw that with the energy stocks in the past year that got caught selling oil way below where they wanted to, but yet had to.
Looking forward, borrowing costs should rise as some of these companies will be starved for cash and have to pay up. Lenders will be stingy with their money and require higher returns. I would not want to own bonds if this happens (we don’t) and my appetite for stocks will be even more picky. The weirdos at the Federal Reserve that have kept rates low will be forced to raise them, even if we are in a recession already, and they will lose most of what little credibility they have left as this will be very painful for investors. We of course prefer to own companies with improving fundamentals that are not in need of borrowing money.
We have had several portfolio companies purchased in takeovers recently, and do not have as many undervalued situations as usual on our watch list, so at the moment, we do not expect to be investing the proceeds aggressively. The uptick in this merger activity is encouraging. Innovation is amazing, but the technology innovation cycle is getting shorter and shorter. Startups with great new products are having those products become obsolete quicker than I have ever seen. Companies have to constantly reinvent themselves quickly or they will lose market share with certainty.
Real estate developments are booming, restaurants are opening everywhere, hair blow out places (yes, I know about them even though…) are springing up, and hotels are busy. Meanwhile, wages are low, inflation is low, and many businesses say that the economic climate is not great. This divergence of all of these factors is difficult to completely grasp, but if the economy heats up just a little, I suspect the market will be much more overvalued than it is now. Even when/if interest rates begin to rise.
The following chart is impressive. What it shows is that the value of treasury bonds goes up when interest rates fall. As you can see, rates have been falling for a long time, and those calling for interest rates to go up (this chart to go down) have been wrong. Higher interest rates should be expected, regardless of how long it takes. Have you seen ‘The Big Short’? I suspect one day someone will time this market on the short side correctly and make a killing.
Paraphrasing Mr. Twain is futile. Yet while he was a great writer, he apparently was a terrible investor, so….
If I can’t earn interest in retirement, I shall not go!
