The market’s half-time report

The market’s half-time report

Financial markets worldwide ended the first six months of the year much better off than they started. Here in the U.S., the Dow and the S&P 500 Indexes both gained 8%, while NASDAQ delivered 15%. The Russell 2000, the small cap index, underperformed (up 4%) and the Transports gained 5%. All-in-all, it paid to be in large-cap, especially the large cap growth sector for the first half. At the same time, the Volatility Index continued to make new lows, despite the fact that at least half the investing population was/is worried and fearful of our new president’s agenda. All of the top 20 economies around the world are growing this year. That recovery is broadening out to include emerging markets as well. It’s the best global growth investors have experienced in five years. And economic forecasts have continued to indicate gains, especially in Europe.  While over in Asia, recession-ridden Japan has managed to gain ground (up 8%). Their economy is stronger than at any time in the last ten years. As a result, international developed markets outperformed our own stock market. The French market gained 15%, Germany 16%, while Spain and Italy also gained by double digits. Emerging markets have done even better, racking up a 17% gain. Individual countries like Hong Kong were up 16%, while China lagged (only up 12%). Most investors do not realize that the decline in the dollar since the beginning of the year had a lot to do with that overseas performance. As the greenback fell, the foreign currency-denominated stock prices overseas gained. Just this currency effect alone boosted foreign returns by 5%...

Cosmetics survive and prosper despite competition

As the clash between brick and mortar retail enterprises and the mighty Amazon escalates, the internet shopping colossus is laying waste to one store or mall after another. One of the few areas that have not only staved off the internet shopping giant, but has actually turned the internet and social media to its advantage is the cosmetics industry. There is a combination of fortuitous developments, some peculiar to the makeup industry, and others the result of adept marketing that has allowed the beauty trade to grow unencumbered. Social media, as you might imagine, has played a big part in growing an industry that has revenues of $62 billion and climbing. For decades, women would pay a visit to their local department store, drugstore, or shopping mall and head for the cosmetics counter. They did so because most women consider makeup a necessity of life. They received a quick lesson in cosmetics application from the clerk or salesperson. At the same time, they could also see and experience these products on their own skin. The only alternative to the beauty shop was to sign up for a cosmetology class, hire a makeup artist or rely on a girlfriend who knew her way around makeup. Today, social media has become both the new beauty counter as well as a place to show off the results. Just check out the number of YouTube tutorials available on make-up. Now that the industry can post videos on Instagram as well, industry experts can hawk their wares easily and directly, but can also show consumers exactly how a new product is intended to be...

Investors need to chill

If you are feeling like today is the beginning of an American Armageddon, you are not alone. Wall Street, most of the media, and almost all of the country’s establishment share your concerns. Those concerns are overblown. If you are tempted to sell your investments, either as a form of protest or because you genuinely believe that Donald Trump will lead us all into economic perdition, don’t do it. Instead, calm down, take a deep breath and put your thinking cap on. The election was a Republican sweep. As such, Congress and the White House have the chance to finally begin singing from the same song sheet. Let’s face it, for the past eight years government has been a dysfunctional mess. Legislatures have seen their approval ratings sink to historic lows. The economy has been limping along at sub-par growth and no one in Washington, except the Federal Reserve, was lifting a finger to change things. Readers may recall that time and again I have written that the Fed was at the end of their rope in their efforts to grow the economy. The past two fed chairmen have said as much to Congress, but no one was listening. Now we have a president who understands the problem and is bound and determined to fix it. President-elect Trump took the working man’s plight as one of his main campaign themes. There are sound economic reasons why he should. Over 70% of the growth in this country is derived from consumer spending. For the past thirty years, the working class has seen their take-home pay dwindle. Today most of us...

This too shall pass

The markets have gone straight down for almost two weeks. The media is becoming more and more pessimistic as the averages plummet. Doom and gloom permeates the investor population. This usually means that opportunity is just around the corner. In my own world, the telephone has been ringing off the hook and my inbox is full of panicky emails. So this column is for all those clients, readers and prospective clients out there who are wondering what the heck is going on. First you must take a look at the emotions you are feeling. Fear, anxiety, even panic are just some of the emotions I have identified in my communications with investors. Most of you reading this column, however, have experienced far worse declines than this through the last few years. Remember the 20% decline in 2011? How about the 16% decline in 2010? If those pullbacks seem hazy to you or if you have forgotten them already, then that should be a lesson to you in how fleeting these market corrections can be. Sure, while they are occurring, the paper losses can be painful, but remember they are not real losses unless you sell them. It is hard to ignore the headlines though. The Wall Street Journal (among others) leads with this front page headline today “Stocks take Beating as Alarm Grows.” Makes you want to sell everything, right? Ask yourself this question: if that headline read “your house is taking a beating as alarm grows” would you sell? Of course not, you say, my house is a long-term investment. Well isn’t your retirement account also a long-term...

Not all bonds are the same

Bond holders are holding their breath as they wait for the Federal Reserve Bank to begin hiking short-term interest rates. Most investors are expecting all bonds to take a hit at the outset of the country’s first rate hike in nine years. What happens after that may surprise you. Prior to the financial crisis and the stimulus policies instituted by the Fed to solve it, bond investors could count on a fairly predictable pattern of behavior among bond categories as interest rates rose. Historically, the Fed would begin to raise rates when they perceived the economy was growing too quickly. Why? Because normally, unbridled economic growth will result in higher inflation, which is something no one wants. Higher rates would force the cost of borrowing to go up. That, in turn, would slow investment, spending and ultimately economic growth. The trick is to raise rates just enough to head off inflation while allowing the economy to continue to grow. In that kind of environment some bonds do better than others. To understand why, you need to know something about risk. To make it simple, there are two kinds of risk. Interest rate risk occurs when rates rise. That risk affects all bonds. Then there is the risk of bankruptcy. Generally, U.S. government entities (Federal, state and local) are perceived to have little or no bankruptcy risk. Therefore, the fear of bankruptcy does not enter into the bond investor’s calculations. Corporate bonds, on the other hand, do have this additional risk factor. It is one reason why corporate debt, whether investment grade, convertible bond or high-yield (known as junk bonds),...

The risk of rising rates

  Conservative investors are becoming increasingly concerned that their bond holdings may be at risk. If and when the Federal Reserve Bank hikes interest rates this year, will bond holders be caught holding the bag? It depends. The short answer would be that when interest rates rise, bond prices fall, if all else remains equal. That’s because bonds have two sources of returns: changes in price and interest payments that move in opposite directions. If you hold your bond investment until the date it matures (whether that is a few months or as long as thirty years), you receive all the interest payments the bond pays out plus your original investment money back at maturity providing you purchased it at par (the price it was initially offered). For those of you who plan to hold your bonds to maturity and are happy with your present rate of interest, then there is nothing to worry about. Rates can rise all they want but why should you care? The problem for many elderly, fixed income investors is that they are not sure they can wait the five, ten, twenty (and certainly not thirty years) necessary to cash in their bonds at par. Secondly, most retired investors acknowledge that at the present rate of interest income received, they can’t make ends meet. So rising interest rates for them is a double-edged sword. It means that in the future the stream in interest income from bonds will improve, but bonds they hold now will go down in price at the same time. If we focus on individual bonds in the short-term, when interest...