The Roaring 20’s!

Raging Bull Market. The financial markets turned into a raging bull market in 2019 as Federal Reserve policy reversed in mid-year from tight money to extraordinary easy money since Labor Day, 2019. With most stock indices at or near record highs currently, investors should enjoy the positive returns and stay invested.

The Wall of Worry remains as trade wars, Brexit, European negative interest rates, and rumors of war prevail. The energy market remained tame through the end of 2019 until the recent prospects of Iran causing political unrest in Iraq. Some things never seem to change. 2020 will be marked with higher oil prices and generally higher commodity prices due to Middle East uncertainty.

The accelerated money supply growth will be inflationary. The courage to print money and monetize the $1 trillion U.S. Treasury annual deficit is unsettling to say the least which eventually destabilizes the U.S. dollar. In extraordinary times, extraordinary policy is favored to thwart negative interest rates in the U.S. capital markets. Ultimately, international investors will begin to dump U.S. Treasury debt leading to higher yields.

To Infinity and Beyond–Ten Largest USA Publicly Traded Companies:

Company                                Symbol            Mkt Cp ($Billions)         PE                   DIV

Apple Inc.                                AAPL              $1.322              25.09X             3.08%

Microsoft, Inc.                         MSFT              $1.225              29.86X             1.27%

Alphabet, Inc.                          GOOG            $943.5             39.81X             0 Inc.                    AMZN            $929.6             83.81X             0

Facebook, Inc.                         FB                   $598.2             33.68X             0

Berkshire Hathaway, Inc          BRK.A            $552.9             20.61X             0

JP Morgan Chase & Co.           JPM                 $442.5             13.57X             2.55%

Visa Inc.                                  V                     $412.3             35.38X             0.63%

Johnson & Johnson                 JNJ                  $384.2             27.33X             2.62%

Walmart, Inc.                           WMT               $337.5             23.56X             1.78%

If you are in any growth mutual fund, you already own these. The 20 largest mutual funds all own these positions in some form or fashion. The price earnings multiples are in the nose bleed sections exceeding 30 times in most cases. Arguably Apple is considered a value stock as it borrows money in Europe to pay its quarterly dividend. Alphabet trades at a paltry 39 times 2021 earnings. Needless to say, we believe that growth companies are outrageously overvalued similar to 1999-2000 bubble.

The growing U.S. Federal Budget Deficit is approximately $22 trillion in outstanding Treasury debt with no end in sight. We will not discuss off-balance sheet guarantees by Treasury in mortgages, and other government agencies that issue bonds which may exceed $75 trillion give or take. Debt has ballooned around the world as issuing bonds is as easy as tick tack toe. The nine largest banks in the USA also issue Credit Derivatives which may exceed $20 quadrillion in size which would trigger should rates rise in any significant way.

The 1978 to 1981 period of time was the last period in which the Federal Reserve inflated our economy. Similar to Germany in the 1930’s, hard assets appreciated in value while financial assets dropped in value. Bond investors saw real market declines in bonds issued beyond five years as inflation rates exceeded bond interest. The misery index exceeded 20 percent in 1979 as Ronald Reagan coined the combination of unemployment and inflation rates.

We believe the housing market remains the best indicator for the direction of the financial markets. Monthly housing starts in the United States that includes residential housing and multi-family housing have recovered from 300,000 to 400,000 in 2008 to 1,320,000 units in more recent data. The strength in housing sends a strong sign the economy is growing along with a 40 year low in unemployment indicates that economic recovery will sustain itself for the next three to five years.

We believe that economically sensitive issues will continue to experience positive revenue and earnings growth for the foreseeable future. Companies with lower price earnings, higher dividend yields, and clean balance sheets should be rewarded in the stock market. We believe that value investments remain attractive for investment.

On February 14, 2020 we will celebrate our 24th year in operation as an investment advisor. The changes in the financial markets continue to be challenging and we continue to be honored to serve as your investment advisor.

Rusty Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027