What happened last week, and what it may mean for the market in 2020.
Warren Buffett
Buffett, with help from partner Charlie Munger and a top notch staff, has generated an average annual return of 20.5% for the past 55 years. The S&P 500 has returned 11.3% per year.
An investor who put $1,000 into Berkshire Hathaway in 1965 would now have a cool $20 million in their account. Granted, his performance lately has not been up to snuff, but as he nears retirement, many are saying that performance will return to what it used to be.
According to Barron's, "Many investors think new leadership could break up the conglomerate to unlock value—or at least be more amenable to an idea that Buffett opposes. Given Berkshire’s $128 billion pile of cash, the initiation of dividends and bigger stock buybacks also seem likely."
If you're one of the hordes of investors who have given up on Buffett's legacy, you might want to reconsider.
Item 1. The Coronavirus
According to Lisa Beilfuss, the most current WHO data count more than 60,000 cases of infection and nearly 1,400 deaths. Most of those cases and all but one death have been in China.
Torsten Sløk, chief economist at Deutsche Bank Securities, expects the outbreak to shave 1.5 percentage points off of Chinese gross domestic product this year. He recently revised his 2020 GDP estimate for China to 4.6% from 6.1%, and said he thinks the virus will take a 0.5 percentage point off of global growth this year.
Item 2. The Bond Bubble
Investors seeking yield are rushing headlong into anything that can generate a return. That includes bond funds. Despite paltry yields, highlighted by the benchmark 10-year Treasury under 1.60%, they poured a record $23.6 billion into fixed-income mutual funds and exchange-traded funds this past week, according to data tracker EPFR.
At the current pace, investors are pumping cash into bond funds at a $1 trillion annual rate, notes Bank of America. And they’re doing it without much apparent regard for valuations or risk.
Amid all of the uncertainties besetting investors, easy money is making it more painful to be out of the markets—equity or fixed income—than to be in them, despite their rising dangers.
Item 3. Regulatory Risk for Big Tech
Eric Savitz says that "for months now, regulators, legislators, activists, and presidential candidates have been calling out the toxic impact that big tech platforms are having on privacy, security, and consumer choice."
"The California Consumer Privacy Act, better known as CCPA, has been in effect for less than two months, while tech companies are still grappling with Europe’s own privacy law, GDPR, or General Data Protection Regulation, which kicked in only two years ago."
Item 4. Natural Gas - the Black Sheep of the Market
What a long, strange trip it's been. Just a few short years ago money and people were flocking to areas of the USA that had deposits of natural gas just waiting to be released into the wild with the help of a new technology called Fracking. It was a new gold rush, and those who got in early made out very well.
But it wouldn't last. The fracking companies pulled so much natural gas out of the ground that they created a glut of OPEC proportions. The result has been an oversupply and under-demand for natgas. Don't worry, though. Help is on the way.
Fracking companies eventually figured out the whole supply-demand thing and began to shut down their drilling operations. That big glut has shrunk to a small puddle. The companies who were smart enough to plan for this are now ready to buy up the losers for pennies on the dollar.
Two names from Barron's are Cabot Oil & Gas [COG]and Cheniere Energy [LNG]. Check them out.
Final Thoughts
Like Buffett and Munger, I take the long view. I'm sitting on 25% cash and underperforming the market as a result. It's an uncomfortable position to be in, but for me and my clients, investing is more of a marathon than a sprint. With each new high, I add incrementally to my position in SH, the inverse S&P 500 ETF.
My advice to bulls is to stay bullish and keep on buying the dips until you are the last of your cohort. And have a contingency plan in place just in case history repeats and facts begin to matter again. The sellers have been on strike since the last bottom on December 24, 2018. Until they return, the trend is higher.