Our Annual Q And A

 

Q.  Will the impeachment inquiry (and possible impeachment) of President Trump put a lid on stock prices, or cause share prices to fall?

A.  The impact of impeachment on the markets is not clear.  From the beginning of Richard Nixon’s impeachment inquiry to his resignation (about a six-month time span), the S&P 500 dropped about 13%.  But from Bill Clinton’s impeachment through acquittal, the S&P 500 gained 28% (source:  Wall Street Journal).  Impeachment is serious, but it depends on when it comes to the market.  We think U.S.-China trade war developments, corporate earnings, and Fed policy will ultimately drive stocks, albeit with impeachment headlines volatility.

—————————————————————

Q.  Should I be worried that the IPO market bubble seems to be bursting?  Will this spill over to the broader market?

A.  Sentiment can be measured in many ways.  Up until recently, there has been optimism that young, profitless companies were worthy of large valuations.  In fact, at one point in late 2018, over 80% of IPOs for the year were losing money.  And 2019 seemed to be on track for the largest percentage of profitless IPOs since the dot-com bubble.  But last week was a disastrous week for IPOs-maybe a one week fluke or maybe part of a sentiment shift.  For example, the highly anticipated IPO of WeWork was postponed, Peloton quickly traded 20% below its recent IPO price, and Endeavor pulled the plug on its debut.

Investors are becoming more risk-averse and sensitive to valuations which isn’t a bad thing.  It is more evidence of the recent shift away from momentum stocks into more reasonably priced value stocks.  Quality is becoming more important.  We believe focusing on quality is a smart strategy that may lead to better results in any market.  And no, the stumbling IPO market doesn’t mean the rest of the market is next to crumble.

————————————————————-

Q.  Manufacturing activity in the U.S. has gone cold.  Is this a sign that a recession can’t be far behind?

A.  No.  Manufacturing has become a smaller part of the overall economy over the last few decades and now only represents 12% of the economy, 9% of payrolls and 15% of capital spending.  The service economy remains strong.

A reading below 50 on the Institute of Supply Management’s (ISM) Purchasing Managers Index (PMI) signals contraction as most economists contend (now 49.1).  But according to the ISM, a PMI above 42.9 generally indicates an expansion of the overall economy.  It’s entirely possible for manufacturing to be in recession while GDP growth runs at 2% or more.

———————————————————-

Q.  You have mentioned on occasion you only buy high quality, short and intermediate-term bonds.  Why not ‘long’ bonds which give you more price appreciation potential when rates drop?

A.  Long bond prices can be very volatile with the potential for big gains or losses.  For that level of risk/volatility, we would rather purchase stocks which have the potential for price appreciation well beyond that of a long bond.  We purchase bonds for income and stability of principal.  We purchase stocks for long-term growth.