May 8, 2019

May 2019-Be fearful when others are greedy

Equity markets rallied strongly in the first part of 2019, with the S&P 500 staging a 26% rally from its low on Christmas Eve to the recent peak on May 1st, but failure to resolve US-China trade disputes has somewhat dampened investors’ optimism. Strategically we remain cautious but slightly positive, as the probability of a deal being reached within a reasonable timeframe is over 50%. Some political pushing, shoving, exchange of words for electoral gains might take place in the interim. Meanwhile fundamentals, especially in the US, remain fairly positive:

– The growth rate in the US is above expectations

– Inflation is under control, but perhaps below average

– Corporate profits are expected to be slightly negative for the quarter, but less negative than initially expected

– Valuations are fine. At USD172 forward earnings a market P/E of 17 looks reasonable. It is slightly above historical average but at the same time the interest rates are well below historical average! 

– The earnings yield of 6pct still compares favorably to interest rates of about 2.5 pct !

– The yield curve is flattish but not inverted.

– Fears of an abrupt slowdown of Q4 2018 did not materialize.

– A trade agreement with China looks very plausible.

– The FED appears less hawkish and the fight with the administration looks less pronounced.

– China and Emerging markets exhibit good growth rates although Europe is rather disappointing.

Strategically we aim to capture the long run 4-6% annual outperformance of stocks over bonds, and leave market timing to the amateurs. Great investors are not attempting to time the market but are interested in the 4-6% equity premium and in their ability invest in a few undervalued situations. We aim to be diversified with a disciplined asset allocation and ready to take advantage of opportunities as they arise.

Best of luck to all of us.

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