Mid- June Commentary
June 21, 2017
June 21, 2017
The equity market continued its slow but steady climb higher into the stratosphere in May, with all the major indices higher for the month. Earnings provided a positive push for equities with a majority of companies showing strong bottom- and top-line growth after several quarters of relatively weak earnings reports. This got analysts excited that the fully valued market may be able to grow via faster earnings as opposed to continued multiple expansion, which is beginning to look like a tougher trade to justify. The market continues to look very narrow with just a handful of companies, the usual suspects – Amazon, Google, Netflix, Apple, and Facebook providing a disproportionate increase to the indices. For the month, the S&P returned 1.41% (8.66% YTD), the Dow gained 0.71% (7.47% YTD), and the NASDAQ gained 2.71% (15.76% YTD). Internationally, where markets have continued to show significant strength, the MSCI Developed Market Index returned 3.53% on the heels of the pro-EU French election results, while the Emerging Markets index returned 2.85%.
Interestingly, as the equity market continued higher, US Treasury yields continued to fall on the long end of the yield curve. This occurrence is somewhat unusual, as falling yields are usually a sign that market participants have a negative view of the US and global economies and expect future weakness. This bifurcation between what equity investors’ actions and bond investors’ actions indicate is somewhat troubling in that both sides are making large financial commitments to opposite economic outcomes, and clearly both cannot be right. The yield curve continued to flatten as the short end of the yield curve, as represented by the 2-year note, rose 2.2 basis points for the month, while the 10 year note and 30 year bond dropped 7.6 and 8.7 basis points respectively. This move is not a huge one, but given the low level of rates, the persistence of the flattening, and the negative implications of continued flattening (lower financial earnings, higher potential for a recession), we continue to keep a very close eye on the yield curve.
We have largely remained cautious in our investing approach, and we continue to apply a time-tested discipline to how and where we invest for our clients. To that end, we are constantly looking for new areas to invest where we can increase diversification prudently with the hope of providing superior risk adjusted returns. In our constant search for new ideas, we not only come across some pretty unusual investment ideas and strategies, but also results that either confirm or refute our overall investment thesis. For some time, we have believed that many areas of the financial markets were moving into unsustainably high valuations. Sometimes we see astounding examples of speculation that absolutely confirm that parts of the market have gone mad. Bitcoin, the crypto-currency that burst on the scene several years ago as an alternative to traditional currencies, is the latest example of a bubble. In May, the price of bitcoin jumped 75.19%; for the year it is up 140.13%. While the technology for Bitcoin is extremely interesting and has the potential for many applications, Bitcoin itself has no intrinsic value. There is no government or product to back its value, yet the speculative fervor for Bitcoin has clearly reached bubble proportions. That said, bubbles can, and do, persist far longer than rational folks consider reasonable, for it is not rational folks investing in these bubbles.
In our opinion, there continues to be too much free money chasing too few financial products, and therefore many financial assets have become overvalued. Money is like water in that it always finds the path of least resistance. However, like a faucet can be turned off, so can the flow of cheap, easy money. As that free money becomes more expensive, and less available, which will happen as the Federal Reserve both raises rates and curtails its quantitative easing program, bubbles are going to burst. We believe that many asset prices are far too stretched to work themselves back to rational levels in an orderly fashion. Thus, we remain cautious in our approach to your money, and take the long-term view to investing.
As always, please do not hesitate to call if you have any questions or comments.
The Quadrant Team