It’s that time of year again. No, not preseason football, but National Girlfriends Day. August 1st marks the special day, a day to spoil and pamper her. There are many ways you can pamper your girl, but one way may be with shares of stock. CNBC recently published an article discussing Kanye West and his gift of shares to his wife Kim. The article states, “it turns out the rapper may have a future in finance…(he) outperformed the S&P 500 by more than 40 percent.” Apparently, last December, Kanye surprised Kim with shares of Netflix, Amazon, Apple, Adidas, and Disney. Netflix, which has taken a beating lately, is up almost 70% and Amazon up around 50% year-to-date.
This is not the first time we have seen headlines like this. Gisele Bundchen, back in 2007, decided to take payment for photo shoots in Euros instead of Dollars. Not the best timing, the next year the eurozone started to deteriorate.
There is a good amount of money chasing a few stocks, as you will see in the chart below. You will see spikes in 1999 and again in 2008. Contrary indicator…possibly. One of the great risks to this market is chasing returns.
Last week it was reported that the US economy grew by 4.1%, which is the fastest pace since 2014. Certainly an impressive number, but it may be an aberration. The economy was boosted by a few one-time factors such as the surge in exports in anticipation of tariffs. These factors may not lead to future growth. The bond market also did not react. What does that mean? When the economy heats up, the bond market anticipates higher inflation. Higher inflation means higher interest rates. However, as you will see below, rates bumped up against 3%, then backed off. The bond market, which tends to be smarter than the stock market, is not convinced the economy will grow as aggressively as the 4.1% would imply.
One catalyst to a second-half rally in the stock market may be found if the tariff/trade war situation is settled. Market participants and businesses seem to be holding back in anticipation of these events. The other wet blanket is the tightening monetary conditions as the Fed continues to raise the short-term rate. Based on the GDP number, it appears the campaign to raise rates will continue. As you may know, the Fed has a two-pronged approach, the first is full employment (low unemployment rate) and a target inflation rate around the 2% level. The former is in check and the Fed is concerned with the latter.
Inflation: The silent killer
Bloomberg reported that Venezuelan police were receiving a 10 million-bolivar bonus. Which sounds great until you realize it is only $3 due to hyperinflation. The International Monetary Fund (IMF) projected that Venezuela’s inflation rate is likely to top 1,000,000 percent in 2018. The US is not in that boat, but obviously, too much inflation is not good.
She takes my money…
We would caution any investor with a desire to be a gold digger, the market has ways to take your money. Some relish the thrill of the chase, be it a relationship or a stock. In the investment game, you should not chase money or a shortcut. It is important to have an investment philosophy, one that you can make stick. We are glad to see the surge in the US GDP but are cautious of that number. We will stay diversified and look for opportunities. Thank you for your continued support and please call us if you have any questions.
Morgan R. Christen, CFA, CFP®, MBA, CDFA
Chief Executive Officer
* Past performance is not a guarantee of future results. Indices are not available for direct investment. Inflation is typically defined as the change in the non-seasonally adjusted, all-items Consumer Price Index (CPI) for all urban consumers. CPI data are available from the US Bureau of Labor Statistics. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. Venezuela https://www.bloomberg.com/news/articles/2018-07-16/in-the-world-s-most-dangerous-nation-police-granted-3-bonus IMF https://www.reuters.com/article/us-venezuela-economy/imf-projects-venezuela-inflation-will-hit-1000000-percent-in-2018-idUSKBN1KD2L9 Treasury Yield https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2018
S&P weighting source Michael Batnick at Ritholtz Wealth Management