Current View on the Markets

The S&P 500 just set an amazing record. This is the longest time that the US stock market has went without dropping 3%. The streak started around the time of the presidential election back on 11/7/2016. Since then the volatility has all but disappeared. This year the S&P 500 index has closed lower 1% or more only four times—the fewest for a full year since 1964.

My outlook hasn’t changed much from the first quarter of this year.  I wrote back in March that I was focusing on investing in innovative companies that were developing autonomous vehicles, social media, the cloud, and artificial intelligence. I had one eye on Washington, and the other on corporate cash flows. The right call over the past 8 years has been to invest in high quality businesses that are either generating high cash flows, paying dividends, buying back shares, and/or growing revenues. When this formula stops working, then I’ll reevaluate.

I decided not to write a second quarter or third quarter outlook because my views haven’t changed much. Here is a quick summary of the trends that I have written about often this year.

Mickey Drexler, the former CEO and current chairman of J.Crew couldn’t have summed it up better this week. “Things have been miserable in retail, The last two or three years have not been fun whatsoever. The trend of consumers changing how they now shop from their phones and computers is showing no signs of slowing.

According to FactSetone-seventh of the nearly $4.2 trillion in global ETF (exchange-traded fund) assets are in funds tracking the benchmark U.S. equity index. Passive funds now own an average of 17% of each component of the S&P 500, whereas passive ownership was “a rounding error” a decade ago. ETFs will continue to scoop up corporate shares and remove supply, which has helped to take stocks higher.

Two weeks ago GM and its self-driving car unit Cruise Automation  deployed a fleet of autonomous vehicles in New York City, making it the first company to launch a test program in the hectic urban environment. I expect that self-driving technology will be required in all vehicles within the next 10 years.

Here is a quote from a newsweek article this week, “world-renowned physicist Stephen Hawking has warned that artificial intelligence (AI) has the potential to destroy civilization and could be the worst thing that has ever happened to humanity.” In the meantime, it’s a safe bet that investors are going to make a ton of money investing in it.

Tech giants Apple, Amazon, Facebook, Google, and Microsoft, are monopolies that are generating huge amounts of cash flows. They are disrupting the economy with new innovations, which has been rewarding to investors. If you follow the money, it would lead you to these companies.

Consumers are cutting the cords. This quarter Comcast lost 125,000 video subscribers and Charter’s pay-TV dropped by 105,000, reflecting the broader trend of Netflix and other streaming companies luring away traditional cable customers.

According to WSJ, investors have been excited about emerging markets across the globe this year. An average of $24.4 billion has flowed into emerging-markets stocks and bonds this year, according to data from the Washington-based Institute for International Finance.

Interest rates are so low that there has not been much of an appreciation in prices. I’ve avoided bonds and prefer other investments that offer higher returns.

A well-known bank analyst reported that banks are swimming in so much excess cash that they don’t know what to do with it. Most banks have been returning cash to shareholders in the form of rising dividends and share buybacks. The largest U.S banks are now buying back shares at a greater rate than many cash rich technology companies.  I expect that this pace of buybacks and dividend increases will only increase over the next few years.

As we head into 2018, there are many structural growth drivers in place that will cause an upside surprise to current GDP estimates. We are in the middle of a boom period that will cause many economists to revise their GDP forecasts higher. My risk to this outlook is that central banks have been slow to tighten monetary policy. Other significant risks to this forecast include a rise in oil prices, interest rates increase, tax reform doesn’t pass, or inflation returns.  I will continue to focus on the above trends. I will update you on them and any new trends that emerge and how I’m investing in them in the coming year.

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