A Déjà Vu Halloween Scare
We’ve been down this road before. Another chapter of government and congress arguing about what it most needs to argue about – how to resolve our growing national debt. Never mind that the federal budget deficit shrunk by over $400 billion to $642 billion in the latest fiscal year. That is a good trend. In all of its glory though, Congress elegantly displayed its fervor in the most recent arguments which culminated in what everyone knew would happen – another version of kicking the can down the road.
Not that everyone knew what would happen. We had all kinds of people making outlandish predictions of doom. The stately IMF head, Christine Lagarde said a failure to resolve the debt crisis would be “absolutely disastrous”. Is that a goblin at our door? Of course not. It seems preposterous that any calamitous event would come out of the budget negotiations. The end result is status quo.
More importantly, investors must think strategically about what is happening when we get these short term shocks like government shutdowns. Shocks set up great opportunities for investors to buy stocks at attractive levels. These are the intervals that investors can use to gain an advantage by buying and not selling. For example, government shutdowns also occurred in 2010 and 2011 and the market rallied both times after the government was reopened.
To reiterate my earlier Overviews, this most recent 1000 point retreat on the Dow Jones from mid September to October 9 is further evidence of the TINA (There Is No Alternative) Principle. The S&P retreated 5% during the same time period. The TINA Principle holds that investors have nowhere else to go but to find refuge with their investment capital in the stock market. TINA holds that interest rates are too low for bonds and real estate markets are too mired in debt for any money to flee from equities.
It is crucial for investors to remember that the economy is deleveraging. This means that governments around the world will be forced into austerity. In addition, spending from industry and the consumer is taking place at the lowest post recovery rate ever. Therefore, in order for the stock market to make strong gains in a fragile and slow growth economy, short term scares that drive prices down temporarily must happen. This way, buyers can buy in at good values and prices will follow a course back up. Once prices rise, investors can sell and wait for the next disruption. This is how shrewd investors, like our clients, can “walk in tall cotton”.
When the Federal Reserve is able to gauge a tepid economy, compensate for a decline in government spending, and print money through its bond buying program, it can create a “Beautiful Deleveraging.” This is a term coined by famed hedge fund titan, Ray Dalio. It refers to the terrific environment for investors to be able to make money in the markets as long as these conditions exist.
During the summer, people feared the Federal Reserve “taper” which would reduce the bond buying program and lessen the money printing. When this didn’t happen, it surprised everyone and the stock market reversed and shot up.
If the economy expands too fast and becomes inflationary, or if the government tapers too much, the “Beautiful Deleveraging” might derail. Effective investment management calls for monitoring signals in the months ahead. As long as we have this delicate balance, the stock market will offer thriving opportunities.
Peregrine Returns and Strategy
Most recently, we have a market of stocks instead of a stock market. This means that carefully selected individual stocks offer far better returns than the overall market. We hear about the slumping businesses of companies like IBM, YUM Brands, Walmart, and Goldman Sachs. Meanwhile, Priceline, Google, Tesla, Facebook, LinkedIn, and Netflix continue to flourish. We continue to look for opportunities to invest in thesenew frontier companies.
During the third quarter, our Equity Composite rose 3.78% and our Balanced Composite rose 1.59%. The S&P 500 rose 5.24% during this time. For the year, the S&P 500 finished September up 19.78%. Year to date, our Equity Composite is up 12.22% and our Balanced Composite is up 5.09%.
In my Overview in July, I warned about our bond holdings damaging this year’s investment performance. Bond values drop when interest rates rise. Beginning in May of this year, our bond holdings for clients have dragged our Composite returns. Although these bond values worsened through August, they have since staged a small recovery. I no longer feel threatened by higher interest rates. It is likely that we won’t have to further liquidate these holdings before year end and may even look to replenish the bonds we sold.
Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.
Do you have questions or would you like to know more, contact Dan Botti.