Happy 4th of July!
Celebrating the Nation’s birthday is a season of reflection that the United States remains the greatest nation in recent history as we enjoy economic and religious freedoms fought for us by our forefathers and our great military in two World Wars. We have the freedom to travel, conduct business, and purchase personal property and real estate that is not available to other countries. We have the freedom to express our opinions in open forums and assemblies. We have the freedom to develop new frontiers in medicine, technology and science which remains second to none on the world stage. More importantly we have the freedom to Worship God and the freedom to pursue our personal economic goals within the boundary of the law and strive to improve our quality of life.
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” The Declaration of Independence, July 4, 1776.
Go back outside and calm the flower children. Historically, the financial markets tend to be weaker during the summer months starting in May and lasting through the end of August. Currently, the broader market finds itself in an economic trade wind. Many stocks provided excellent returns in 2016 and now have corrected some 20 and 30 percent from the beginning of the year. At 2427 on the S&P 500, the market may be poised for a pull-back. Obviously, the financial system appears to be on better financial footing than ten years ago. Yet, we believe further interest rate increases or Fed tightening will throw the U.S. economy in to a recession within the next eighteen months.
Oh, you must be jesting, Dick. Economics dull? The glamour, the romance of commerce… Hmm. It’s the very lifeblood of our country’s society. The Federal Reserve has indicated on many occasions that interest rates need to rise in order to restore normalcy to the commercial banking system. Yet, the U.S. Treasury market recently saw yields drop after a sharp rise in December 2016. With nearly $20 trillion in outstanding debt, paying 1.82% to refinance debt for five years is not a bad rate, or 2.76% for 30 years. Since the inflation rate is not anywhere near 2%, the recent decline in Treasury yields indicates that deflationary forces are impacting the economy at present. Even the energy market has seen prices in crude oil and natural gas decline in the last six months. The world is awash in oil and gas which will be a major positive for the economy. We now believe the Fed will not be able to raise interest rates until we see commodity prices rise.
Current U.S. Treasury Yields 6/28/17
90 days 1.00%
180 days 1.14%
1 year 1.22%
5 years 1.82%
10 years 2.22%
30 years 2.76%
That’s one trouble with dual identities, Robin. Dual responsibilities. Going forward, we believe the fiscal and monetary policy will actually work together to maintain reasonable economic growth for the next eighteen months. Budget discussions continue to favor increases in infrastructure and defense spending. We believe that historically low mortgage rates will enhance higher housing sales. Additionally, the hope of lower corporate income taxes will be a major shot in the arm to the economy as it will encourage further capital formation and the possibility of bringing an estimated $2 trillion held in overseas banks back home to U.S. banks.
I know. Hieroglyphics self-taught are a chore, Robin; but, it is a surefire way to unravel the secrets of the ancient mystics. The U.S. stock market is up for the first six months of 2017. Similar to 1999, the movement in the indices can be attributable to five stocks: Facebook, Google, Amazon, Netflix and Apple. We reviewed ten of the top growth equity mutual funds and all of the funds include these five companies.
June 26, 2017
Price Earnings Yield Mkt Cap Revenues
Facebook 40.7 times 0 $446 Billion $38 Billion
Google 32.3 times 0 $667 Billion $87 Billion
Amazon 149.0 times 0 $476 Billion $166 Billion
Netflix 207.0 times 0 $68 Billion $11 Billion
Apple 17.1 times 1.7% $761 Billion $226 Billion
Things…are..about…to…get…stickier, Robin. Housing and Biotechnology companies have experienced positive returns for 2017 but clearly trade at high price earnings ratios or have no earnings at all. Ironically, in 2001, the European Union filed an anti-trust lawsuit against Microsoft in April which coincided with peak in price for fifteen years for Microsoft. We do find it very interesting that the European Union filed a $2.6 billion anti-trust lawsuit against Google on June 27, 2017.
The true crimefighter always carries everything he needs in his utility belt, Robin. The industries which we find attractive continue to be industrials, telecommunications, pharmaceuticals, chemicals, and papers. We are neutral on banking, energy, utilities, and insurance companies. We like companies that pay dividends which are supported by consistent earnings. We would avoid companies that trade at higher price earnings ratios and believe the risk/reward for these companies would be very vulnerable to a market correction.
I think you should acquire a taste for opera, Robin, as one does for poetry and olives. We do favor common stocks over fixed income for the next three years. With the major U.S. stock indices trading at all-time highs, we recommend caution and hold off on new commitments to the market. We believe that investors will get a window to invest later in the year. We look forward to hearing from you and still consider it an honor to serve as your investment manager.
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027
Captions in Honor of quotes from Batman TV series 1966-1968, Adam West passed June 9, 2017