Weekly Observations for 4/27/2018 — Investment Trends

Greetings from Austin, Texas!

This evening I am meeting with Todd Harrison and his team to further explore their research into several investment themes I’ve been following for the past year. I’ve been really looking forward to this trip and conversation for a few months. We’ll have a business dinner with them tonight, then Rebecca and I will enjoy a day together tomorrow exploring Austin.

There were some interesting divergences in the markets this week — which began with a selloff early in the week, followed by a strong rally on Thursday. Companies such as Caterpillar reported earnings, beat expectations, and then sold off hard — CAT was down over 9% in a single day and didn’t recover during the subsequent rally.

Then, everyone’s favorite technology companies — Facebook, Netflix, Amazon, et al — reported and drove the markets higher. It was an ironic week, with large, stable, cash-generating companies selling off, while unprofitable and overvalued tech stocks rose. By this measure, one could argue it has been an ironic couple of years!

However, all this action left the overall market conditions virtually unchanged. We are still very much moving within a tightening series of lower highs and bounces off of low resistance levels, with no significant moves since the February selloff that broke the parabolic rise of 2017.

In time, the market will break away from this consolidation one way or the other — and which way is anyone’s guess. Although history and valuations suggest a continued decline is more likely than a renewed rally to new highs. We’ll see.

But regardless of the next short-term move, an elementary analysis of debt, cash flow, profit margins, and growth potential reveals that stock and bond market returns for the coming decade will be anemic at best. (See GMO, Research Affiliates, and other outlooks.)

Building and preserving wealth (inseparable endeavors!) during this period will require second-level thinking (Howard Marks), and following unique investment themes that have yet to be recognized by the broad market. This is the reason I am in Austin.

For the past 40 years, achieving a rate of return that was capable of meeting any reasonable investment goal only required a portfolio consisting of stocks and bonds, preferably held in US Dollars, as both of these dominant asset classes experienced a simultaneous bull market of historic proportions. Looking forward, achieving a similar outcome will require the inclusion of cash periodically, hard assets and commodities, real estate, and targeted equity opportunities.

It is a truly interesting and challenging time to be a fiduciary of client wealth. The responsibility of guiding you to successfully reach your goals and lifetime income needs weighs constantly on my mind, and I am excited and grateful for the work I get to do every day.

Thoughtfully,
Kenneth