WHAT’S UP, 2020?
“The S&P 500 was trading at 18.2 times 12-month forward earnings as of 20th Dec1”. That meant that the prices of the US stock market were 18.2 times their earnings per common share. Generally, high ratios can mean that equities are overvalued, or that investors are expecting high growth rates.
So what would 2020 hold for us?
Unicorn has always believed in being prudent and buying undervalued equities, which translates into a wider margin within which we manage our risk. We have thus steered clear of the markets which are deemed overvalued, e.g. the US.
Essentially, we do not believe in chasing the market – instead, we continue to improve our investment framework.
Warren Buffett, arguably the most successful investor alive, is sitting on a growing $128B cash pile2, out of $788B that Berkshire Hathaway is managing in total. Even though Buffett doesn’t like holding cash and he prefers not to time the market, he has not been able to deploy much of this cash pile as he has not found good value.
“A few months ago, predictive models were showing increasing probabilities of a recession in 20203.” And yet, with the good news of relatively strong corporate profits, FED easing, and a trade deal with China (possibly), the fears of an impending recession seemed to be evaporating. Jeffrey Gundlach, “King of Bonds”, also stated that the odds are against recession before the end of 20202.
But the elephant in the room hasn’t magically disappeared.
Investopedia specifically highlighted: “high levels of national debt for prolonged periods of time have a severe impact on the overall economy. As the US national debt clock keeps ticking:
- Higher interest will have to be paid on government debt.
- Higher debt levels will mean limited jobs and lower salaries.
- Increases in interest rates will cause borrowing to become difficult at all levels, including for individuals/corporations/mortgages.
- Operating in the US will be viewed as riskier in the eyes of the world, undermining continued foreign investor confidence and investments in the US.
- The risk of the country defaulting on its own debt obligations may lead to further downgrades4.”
Can the US continue to outrun its debt? Or perhaps, the real question is, how long can the US outrun it? Will the stock market continue to rally, and for how much longer? Are investors being realistic currently as they persist in expecting the stock market to generate ever-higher returns?
Gundlach also said that when the next recession comes, the growth of US debt will reach double digits percentage of the GDP2. It was already growing at “over 6% of the economy2”. In fact, the US is poised to lead the world in debt increase:
However, this debt has fuelled growth in the US and a rallying stock market, which benefit a second-term-seeking Donald Trump, whose tweets incredibly move the market (thankfully, only in the short-term). So when the situation gets worse, and in order to hold up the mirage that everything is fine and dandy, Trump will probably resort to more erraticism.
At Unicorn, we firmly believe that fundamentals are paramount. “The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine – tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine – assessing the substance of a company5.”
Even though the stock market may be rallying, it is the substance of the market that we are truly interested in. Thus, we are committed to keeping a close watch on the global economy, especially on the US, to position your portfolio in the best way possible, so that you can take advantage of the opportunities as they arise.
While others time the market, we work to ensure that our framework is sound; because ignorance can be forgiven, but someone must pay the price. Stay tuned!
- Investor’s Business Daily
- Seeking Alpha
- The Intelligent Investor, Morningstar
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