A gentle reminder was provided by the market last week as to its unsettled nature. Essentially, headline risk is at the forefront tossing the market based on the sentiment of the day – oft times lubricated (or diverted) by a Presidential tweet. Granted, this is little changed from the past but we do have an increasing clarity to use as a guide.
What is unchanged is that US valuations remain elevated. Sure, there were some stumbles during the recent earnings season and some cautionary guidance presented. Barring a black swan event it does appear the next recession (US version) has been punted into the future – at a time post election. There are – and will continue to be – pockets where value can be had, but I see this opportunity being readily available only to individual stock pickers willing to accept a slightly higher risk factor.
Headlines have also illustrated a measured success that Presidential bashing of the Fed failed to accomplish. The dollar weakened – a little. On the heels of the results from the UK election, Sterling strengthened. My opinion being this is a relief rally at seeing an end to the Brexit saga as the real work now can now begin in earnest. These negotiations may get bogged down a little – particularly trade – which could provide a reentry point for Labour and their agenda of nationalization. I see the UK as a viable alternative but with risk associated in telecoms, energy, utilities, rail and mail. Perhaps a mid-term view is required with an entry point sometime after the first of the year.
Much the same boat for China as the renminbi strengthened against the dollar as the news of a “phase 1” agreement on trade crossed the wires. What this means probably remains debatable, but if a truce is effective going into the new year it is a likely positive for US equities, tempered by the fact that their currency is a daily peg rather than free-float. The risk here is twofold – on and off again tariffs and US involvement in their political affairs (Uyghur Human Rights Policy Act and Hong Kong Human Rights and Democracy Act). The bills appear to be more show than substance but could flare tensions. The investment thesis should note the alleged Human Rights abuses along with the minimal sanction levels. If these pitfalls are successfully navigated, opportunities do exist.
Then there are the fintech darlings, the newest variant being the so-called ‘Challenger Banks” or neobanks. Though awash with cash from private funding rounds, they all have one glaring defect – they aren’t really banks. They are apps – generally mobile – with a compelling interface and a few niche benefits targeting the millennial audience. A couple have started the process to really become banks but most are content to partner with real banks – sweeping funds into accounts that have FDIC insurance. My research remains incomplete but with three exceptions, the partner banks pay no dividend or are private. I currently own the exceptions, GS, JPM and WSFS but don’t expect the challenger funds to be a significant revenue driver.
Perhaps the largest driver of ‘hot air’ time in the new year will be the election. The obvious beneficiaries being media companies who are able to capitalize on both sides of an argument. However fragmentation, targeting and scope make it more difficult to call any winners unless any campaign goes on a deep targeting offensive which would benefit social. From a messaging position, only health care moves the needle much where companies like UNH, HUM and CVS stand to benefit as the attacks subside.
The commonality between these issues? None are long term. Yet the nature of capitalism is its’ cyclical nature. There is always a correction to drain the excesses. The timing and severity are always debatable, but rest assured one will arrive. My approach to the new year will be to take some marbles off the table by pruning some non-core positions and reassessing some strategic plays. To place this in context, I have three new positions on my watchlist and ten to fifteen under review which if fully implemented would be roughly a 5% churn rate. My comfort zone is now squarely with Staples and Utilities … items necessary for consumer consumption regardless of the overall economy. Yes, the upside is muted with these companies, but more importantly the downside risk is mitigated. A rising dividend stream exceeding the rate of inflation is the core goal in these times in spite of politics or political persuasion.
And so goes my crystal ball for 2020 …