Category: General (page 1 of 14)

WCM Chart of the Moment for February 3, 2020

In the wake of Brexit and the risk of a pandemic it was time to take a diligent step back and compare current happenings with a bit of history. As the Coronavirus spreads within China and the WHO raises the specter of a global pandemic, investors have become concerned about the impact on the human condition and the global economy. During the SARs outbreak in 2003, Chinese economic activity was sharply impacted as GDP decelerated from 11.1% to 9.1% in the second quarter of 2003, and retail sales growth plummeted from 11.1% to 4.5% in the April to May months of that year. The SARS epidemic may, in contrast, look reasonably contained given what we don’t know about the Coronavirus. From a global economic standpoint, the Coronavirus impact is likely to be more severe given that China’s economy in 2003 represented a much smaller share of the world and it was much less consumer-oriented then.  Chinese officials have limited travel and quarantined large segments of their population in order to limit the spread of the virus.  Those actions will likely lead to stunted manufacturing output, and more importantly lower levels of consumption and retail sales which today represent a larger share of China’s economy.  The impact of an even slower growing China will likely be a challenge for growth in the rest of the world. [chart courtesy of Bloomberg LP © 2020]

WCM Chart of the Week for January 10, 2020

When you measure is everything.  The major stock indices in the United States posted the strongest returns in recent years with the Nasdaq up 36.7%, Dow Jones Industrials up 25.3% and the S&P 500 (pictured below) 31.5% on a total return basis in the calendar year 2019.  These results are undoubtedly impressive but are highly endpoint dependent.  At the beginning of 2019 the equity market was reeling mainly due to the perception that the US Federal Reserve intended to pursue overly restrictive monetary policy only to announce quite the opposite at this time last year.  The beginning of 2019 was a low point for US equity indices and the year ended with all-time record highs, producing very impressive calendar year returns.  What we highlight on this week’s chart is the 14.26% total return (11.16% annualized) of the S&P 500 when measured from the September 2019 high prior to the fourth quarter US Fed-induced market rout. That return is historically strong but not as dramatic as measuring January to January would suggest.

For a bit of recent historical perspective, 2013 surpassed 2019 when the Nasdaq, Dow Jones and S&P 500 delivered total returns of 41.7%, 29.7%, and 33.1% respectively, followed by solid returns (all three indices posted 10%+ total returns) in 2014. [data courtesy S&P, chart courtesy Bloomberg LP © 2020]

WCM Yule Chart for 2019

Nothing says holiday cheer like Asian exports. Actually, come to think of it that probably says a lot about holiday cheer depending on what is under your tree, menorah, or Festivus pole. Equities in Asia have been rallying since early this Fall but have underperformed global peers this year. But, on a positive note, container traffic in Singapore just hit an all-time high, which should be supportive of Asia’s bourses going forward. The reason container traffic is important is because it is a barometer of trade momentum in the region and Singapore is a strategic transfer point for goods. Its exports hover around 200% of GDP.  Trade flows should continue to improve with Phase 1 of the US – China trade agreement and US House of Representatives passage of the US Mexico Canada Agreement (passage in the US Senate is likely).  These developments are critical considering global economic activity is moderating. [chart courtesy Bloomberg LP © 2019 and Maritime & Port Authority of Singapore, MSCI]

It’s beginning to look a lot like retail

As our esteemed Doug Wilde regularly points out, manufacturing isn’t the bellwether it once was of US economic output. We are a nation of users, not makers, now, and Retail is what matters. Unless you live in a well-stocked bunker, it is hard to avoid the focus on retail consumption this time of year. We will soon wrap up the big week of consumption capital in motion from “Black Friday” through “Small Business Saturday”, “Cyber Monday” and “Giving Tuesday”. That last one is of course about giving charity and not presents, but the relentless campaigns in person, by phone, and online have made it feel like one more consumption decision while rummaging through the wallet or purse.

From an investor’s point of view it is increasingly difficult to gauge retail activity because how people shop has shifted significantly in just the last few years. Reporters standing in shopping malls near the Santa villages breathlessly pointing to the crowds and bags does not tell the whole story. Even the viral mayhem videos at discount department stores when the throngs pummel each other to grab the BOGO Alexa-enabled combination teddy bear/espresso machine/lawnmower are entertaining yes, anecdotal mostly, informative not so much.

What we hear again and again is that online is killing traditional retail. For anyone who has walked this Earth for long enough there is actually a little bit of schadenfreude since today’s “traditional retail” killed local merchants and main streets a generation or two previously. We do agree that online shopping has been the weapon of choice to kill off department stores and shopping malls, but this is not some great innovation or revelation. Us oldsters remember Sears, JC Penney, Montgomery Ward and other catalogs where almost anything under the sun was a phone call or mail order away. For families that lived out in the boondocks, that was the only way to access a lot of products, not much different from today where significant portions of the population are not close to “traditional retail”.

So why do we care as portfolio managers? First, we do want to obtain a clean look at the American consumer as an indicator of the health of our economy. Second, consumption patterns tell us a lot about where growth can be found, and of course has a direct connection not just to the growth of equities of companies all along various supply chains, but to the growth of debt to finance making, selling and consuming. Employment patterns are also closely tied to consumption patterns, particularly during the holiday season.

We see the mix of retail venues changing. Other than automobiles, where the traditional distribution structure is consolidating but not really changing despite Elon Musk’s best efforts, with whom and when people shop is shifting. We can now do a lot of financial damage with an iPhone while wearing footy pajamas and binging The Office. And even through that little 5.5” window, the process of consumption is changing. An influencer on Instagram can hype a product, provide an in-app link, and voila, you are purchasing it with a couple finger taps. The reality now, as we have written before, is that America is simply over-retailed. There are too many places and ways to buy the same products. A lot of the factors that differentiated channels before have dissolved. Price differences have been arbitraged away because of comprehensive access to competitive pricing information. The quest for instant gratification can be satisfied as easily by clicking and waiting by the front door as heading to the mall. Expertise and consultation are more likely to be found online than with the teenaged clerk who is just counting the hours until the shift is over. And when those teenagers do get off work, they aren’t going to roam the malls and food courts themselves to socialize and maybe spend. They may be going home and meeting up with friends through MMO games and even spending those earned dollars leveling up their avatars with swag or new capabilities. How do you measure that in old retail terms?

If people are buying directly from manufacturers’ branded captive websites and catalogs, or through social media, or through major online portals, and of course through bricks-and-mortar stores, how do we get anything resembling a complete much less accurate picture of retail consumption? Some of that insight can come from looking elsewhere in the supply chain. We can consider raw materials, packaging, shipping and logistics, royalties and licensing fees. We can look at volumes through final mile services like UPS and Fedex. We can look at sales tax receipts (although the patchwork of rules around interstate tax collection means this gets you a massive undercount). We can look at hiring, particularly seasonal hiring, which is moving away from retail counters and towards fulfillment centers. We can also look at aggregate transactional data from consumer credit and newer virtualized and peer-to-peer payment methods.

The big issue is that a lot of this data is scattered, not gathered and reported in a timely fashion, and has to be collated and interpreted. Joe the Weatherman reporting from the mall about how long the lines are and how full the bags is not going to do it. We will also look at but retain healthy skepticism about reports from trade groups like the National Retail Federation, which exists to promote the interests of its members. Useful information, but it has to be viewed in the context of its mission and stakeholders. That leaves us the government statisticians, who don’t necessarily have an axe to grind, but the data is lagged and the coverage has not always kept up well with how the retail landscape has changed. The US Census Bureau will be releasing the November 2019 Advance Monthly Retail report on December 13th.

Right now we see the US consumer as reasonably robust. The change in how consumption is taking place means looking elsewhere in the markets to participate in that growth. For instance, instead of REITs that own shopping malls, favor REITs that own warehouses. Look for themes like electronic payments. And of course, trends toward local, organic, fair trade, reclaimed, and other sustainability themes are driving retail flows and even countering the race to the bottom in pricing.

According to the New York Times, more than 90,000 packages a day go missing daily in New York City, and 1.7 million daily nationally. That is clearly a problem on a massive scale. But if that much can go missing or be stolen daily and not break the system or materially drive up costs, the scale of consumption outside of traditional retail store fronts is extraordinary. Maybe this number more than any other is the bellwether indicator we need to watch.

WCM Chart of the Week for November 15, 2019

Large Cap stocks in the United States have outperformed the rest of the world for the better part of the past ten years largely because of superior demographic, economic and corporate conditions in America.  However, there have been several periods this decade when international bourses have gained ground on America and that has been the case since mid-August this year.  While US companies have tended to exhibit robust fundamentals compared to their international rivals, stock market valuations favor international equities. Can the rest of the world continue to outpace the US?  We continue to favor American stocks and bonds because economic conditions abroad continue to be challenging.  Eurozone economic activity is barely expanding, although the German economy did surprise on the positive side (thus narrowly avoiding a recession) and Chinese GDP growth may be slowing more than expected.  The headwinds international markets face may prove to be too much to overcome from a relative performance standpoint. [chart courtesy Bloomberg LP (c) 2019]

WCM Chart of the Week for November 8, 2019

The global rally in stocks and key US equity indices hitting all-time highs are again garnering the majority of the financial press’ collective attention. We however prefer to focus on government bond markets. Long-term interest rates may have bottomed towards the end of this past summer. 10-year government bond yields in key developed economies are on the upswing and may even have positive readings in Japan and the Eurozone before year end. We find the upward interest rate trajectory interesting in the context of the US Federal Reserve’s recent decision to lower its target rate. It is encouraging that yields are rising together which may be a signal that economic conditions across the globe are stabilizing and safe haven asset prices are falling. [chart courtesy Bloomberg LP © 2019]

WCM Chart of the Week for November 1, 2019

Growth stocks in the US have outperformed value stocks for the better part of the past three years with the exception of the US Fed induced sell off at the end of last year. However, since mid-August value stocks have outpaced growth stocks by a considerable amount rallying nearly 8% versus 3.5% according to S&P 500 Value and Growth indices.  If value stocks can continue to outperform or even keep pace with the overall market, we would view this as a positive development because it could mean that broader participation is developing.  That is important because the S&P 500’s largest the sector, Information Technology, continues to outperform, powering the market higher.  We find this interesting because usually technology stocks outperform with growth leading value. [chart courtesy Bloomberg LP © 2019]

WCM Chart of the Week for Oct. 11, 2019

Volatility in US Treasury prices has been building for the past six months or so as measured by the ICE Bank of America Merrill Lynch Move Index. That is not all that surprising given the magnifying effect even small interest rate movements have on Treasury prices in today’s low rate environment.  The challenge investors face is that bonds, particularly longer-dated issues, offer anemic income streams and the likelihood of principal erosion as rates rise to more normal levels.  We continue to maintain lower duration within fixed income allocations than our benchmark because we believe that the long end of the yield curve, here and abroad, offers little investment merit and the potential for a great deal of volatility.

WCM Chart of the Week for September 6, 2019

WCM Chart of the Week for September 6, 2019.  Large Cap US stocks continue to outperform with the S&P 500 total return reaching 20.7% YTD through (September 5, 2019).  This end of the US equity market, in particular, the Technology sector, contains the world’s strongest performers so far in 2019.  US Small Cap equities however have lagged considerably, only gaining 13.2% over the same time period while global stocks as measured by the FTSE Global All Cap Index have advanced 15.8%.

Economic trends in the US are much more favorable than in other key regions such as Europe and Asia. US Small Cap companies generally are more domestically oriented while Large US companies earn significant amount of revenue overseas.  Intuitively, the global environment should favor US Small Caps but that has not been the case.  The key might be the low interest rate environment enabling large companies to raise substantial amounts of debt through the corporate bond market while smaller companies are more dependent on regional bank financing. Another key factor explaining the performance disparity between Large and Small Cap stocks may be sector representation.  The financial sector of the S&P 500 represents roughly 12% of the index while the Russell 2000 has about 17%.  The financial sector has been a laggard overall and a small financial service company’s revenue is generally more dependent on lending which tends to struggle in low interest rate environments.

This week’s chart shows the total return relationship of US Large relative to Small Cap Equities.  Large Cap stocks are trading at their highest levels relative to Small Caps in at least the past 15 years and are clearly extended.  This is highly unusual but may persist at least until the US Federal Reserve ends its current rate cutting path and other monetary stimulus activities. [chart courtesy of Bloomberg LP (c)2019]

WCM Chart of the Week for August 30, 2019

As we end the month of August US stocks have contracted 1.7% while US bonds have advanced 2.5% (through 8/29) and it seems like we have been in a tug of war between the asset classes since at least last fall.  Could we be at a pivot point when investors rotate back into equities?  The chart below shows the total return relationship between the S&P 500 and the Bloomberg Barclays Aggregate indices and it appears that large cap US stocks may be bottoming relative to bonds.  The bond market has been supported by a benign interest rate environment as the yield on the US 10 Year Treasury Bond has fallen from 2.68% at the beginning of the year to a low of 1.47% on August 27th.  There are several reasons why rates have fallen — no real inflationary pressures and lower and even negative interest rates in the rest of the developed world.  If rates stabilize around current levels, equities should regain leadership given that corporate fundamentals remain solid, market valuations are not elevated, and the US economy is still expanding. [Chart courtesy Bloomberg LP (c) 2019]

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