InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
APRIL 4, 2018
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
Is the stock market making you queasy? Well, get used to it! The Age of Volatility has begun!
We will discuss Markets and The Economy over the next few weeks in IntelDigest. We begin, today, with the immediate causes of Volatility and taking the first step into a new era in the Markets.
The Trump Tax
We have written that “… an honest-to-goodness Trade War could be just the thing which would derail our economic engine.”
Trump is overriding the positive aspects of the 2017 tax legislation by imposing new “taxes” on Americans, across the board. These “taxes” are in the form of Tariffs. Both U.S. Tariffs which Trump plans to impose on foreign goods, which will raise prices on products purchased by all Americans. And, retaliatory Tariffs proposed by our trading partners/adversaries, such as China, which amount to a “tax” on American businesses striving to sell American products overseas.
In our last issue, we showed you that:
In a survey conducted this week by CNBC.com, the threat of a Trade War is rapidly becoming the top economic fear on Wall Street. Nearly two-thirds of the survey respondents see Trump’s trade policies as negative for overall economic growth and likely to cause job losses in the U.S.
Protectionism tops the list of worries on Wall Street, far outpacing concerns over inflation, terrorism and even Federal Reserve actions.
Certainly, historically-high stock valuations and concerns over rising interest rates contribute to increased Volatility in the Markets. However, the roller-coaster-effect which will define this year is directly attributable to the Trump Trade Policies.
The Age of Volatility will certainly last through the end of 2018, until the beginning of the next major recession. The “Melt Up” in equities is in the “Ninth Inning” … just a few more months of possible gains in select stocks. For the bulk of the investment markets, we are moving into a new era. There will be significantly fewer “trending” stocks and more “reversion to the mean.”
The path forward will feature choppy trading, extreme swings up and down, and headaches for “bulls” and “bears” alike.
Finding Value
We are moving away from growth stocks and an era of skyrocketing tech toward a “Value” model. Here are a few different approaches to finding Value in the markets.
Individual Stock-Picking
April is traditionally a very strong month. A study by Bespoke Investment Group shows that April has been the strongest month of the year over the last 50 years, with an average 2.04% gain. Over the last 20 years, April gains have been even better, averaging +2.39%.
This April will also feature the first corporate quarterly sales and earnings reports under the new tax law. Most U.S. companies should benefit greatly from the Tax Cuts and Jobs Act of 2017 (TCJA); many are paying lower federal income tax rates, starting in this quarter, and most large multi-national companies will repatriate Billions of Dollars of earnings from overseas accounts (at low tax rates) this year.
So, many individual companies … especially traditional “Value” stocks … are expected to report blockbuster results in the next few weeks, which will reward their investors.
Exchange-Traded Funds (ETFs)
There should also be room in your portfolio for more “passive” funds, such as ETFs. Broad sector trends can be easier to spot than finding the best individual companies in an industry. For example, our clients have been able to maintain positions in the Mobile and Electronic Payments sector and the Cybersecurity sector by investing in IPAY, the Prime Mobile Payments ETF, and HACK, the Prime Cyber Security ETF, respectively.
ETFs also provide diversification, protecting the investor from negative events which may affect one company …. bad earnings report, cyber attack, lawsuit, retirement of a key leader, or dozens of other unpredictable events. Holding a basket of dozens of stocks reduces the overall volatility in the portfolio.
ETFs are easy to trade … their high trading volume makes for a very liquid market.
ETFs also allow the investor to easily own a piece of very expensive stocks, which may be valued at Hundreds of Dollars for each share. For example, an investor can buy XLK, the Technology Select Sector SPDR Fund, for $65 per share. This fund holds shares in dozens of stocks including Apple, Alphabet (Google) and Microsoft. A single share in these companies would cost $117, $1,020, and $90 per share, respectively.
True Diversification
Be sure to identify exactly what companies are represented in the funds which you are considering. You are not truly “diversified” if you own two or three different funds which invest in the same companies!
We advocate for “market intelligence” and “true” diversification among sectors. Market Intelligence refers to studying and learning the differences among companies and sectors. For example, two companies may look alike and operate in the same industry, and seem to be twins to the outside observer. But, a prudent investor looks for the factors which differentiate the growing company from the stagnant company.
Similarly, exchange-traded funds should be examined for their management, investments, and weighting.
For example, the S&P constructs its index fund based on the market cap, as indicated by the float. The float is the number of shares outstanding, less shares held by insiders. As a result, the index over weights shares with low insider ownership, such as Western Union; it under weights shares with high insider ownership, such as Berkshire Hathaway.
The prudent and intelligent investor would do the opposite!
We like to seek opportunities among companies overlooked by the indexes. And, as the aforementioned “Melt Up” plays out over the course of this year, we will be changing gears and looking for Value moving forward.
As indicated, we will be discussing The Economy in IntelDigest throughout April.