Bob’s Journal 1/9
You can’t anticipate what’s going to happen next between the United States and Iran or between the United States and China.
Events and rumors regarding those conflicts move the markets many days and over longer periods of time. You could try to guess which way the conflicts will go and invest accordingly. Of course, you’ll be taking a big risk that your guess is wrong.
You’re better off not trying to guess. Instead, create a diversified portfolio that should do well in almost any environment. Have some of your assets in safe havens such as gold. Hold other assets that will do well if things go well and the global economy continues growing. Avoid any assets with prices that are stretched or speculative. You need a margin of safety.
That’s what we do in our Retirement Watch portfolios.
What Are Traders Doing?
Do you know that an investor could have made more money by investing in stocks when the markets were closed than when they were open?
That’s the conclusion of some research that was done by the Bespoke Investment Group.
Some people use a trading strategy of buying when the market opens and selling near the close or some time earlier in the day. They reason that because overnight orders flow into brokers, that burst of buying pushes prices higher.
Bespoke tested the opposite strategy by buying near the close and selling at the next day’s opening. In other words, they only owned stocks after market hours.
Over the last five years, that after-hours strategy using the S&P 500 would have more than doubled the returns of buying at the open and selling at the close.
In fact, Bespoke went back to 1993 and concluded that all of the gains in the S&P 500 could be earned using this after-hours trading strategy. The market-hours strategy would have lost a small amount of money if it had been practiced since 1993 while the after-hours strategy would have produced a return of 732%, not including dividends.
If the after-hours strategy is too much work for you, consider trading only during certain days of the week.
The traditional strategy of buying the open and selling the close during the last five years would have made money only on Wednesdays and Thursdays. The after-hours strategy made money every day of the week over time but had the highest gains by far on Tuesdays.
I’m not recommending any of these as a strategy, though they are more feasible since most brokers no longer charge commissions on many trades. Bespoke says all of the gains since 1993 have occurred after hours, so all that trading wouldn’t improve returns from buying and holding.
It does make one wonder what all those traders are doing all day.
The Coming Tech Upheaval
The leading technology companies like to describe themselves as disruptors. However, it looks like their business models are about to be disrupted.
A leading principle of young tech companies, and some not-so-young companies, is to grow quickly. The idea is that “scaling up” gives you the name-brand recognition and makes it harder for competitors to catch up.
But, as Barron’s points out, most of these tech companies achieved their revenue and customer growth by offering goods and services at very low prices and sometimes for free. By doing this, the companies lost a lot of money.
For many of these companies, there is no scenario under which they will make money any time soon. Their customers are used to paying very low prices (or nothing) for their goods and services. Furthermore, there are enough competitors so that if one firm tries to raise its prices, customers can switch to its competitors.
Investors are starting to rebel. The turning point was probably the failure of WeWork’s initial public offering.
Investors want to see profits at some point.
One likely consequence is that a lot of these firms, and perhaps entire market sectors, will disappear. Ride-sharing services, scooter-sharing firms, food delivery businesses and more are facing a reckoning.
Even video-streaming services are undergoing an upheaval. As new services from major firms start up, it’s clear that all or most of these services operate at losses. Several have been raising their prices and a few have closed.
You’re likely to feel the effect even if you don’t invest in these firms. Users of the services and buyers of the goods are seeing price increases and decreases in services. And, as I mentioned, some of these firms and services are likely to disappear.
The Data
The ISM Manufacturing Index said that the manufacturing sector is continuing to weaken. The index for December slid to 47.2 from 48.1. This is the lowest reading since 2009. Analysts were expecting a small improvement. Any reading below 50.0 indicates that the sector is contracting. December is the fifth consecutive month that the index has indicated a contraction in manufacturing.
Factory orders also didn’t do well, declining 0.7% in November. October’s orders were revised down to a 0.2% increase from an initial 0.3% increase. A major part of the decline was in transportation, especially aircraft orders. But core capital goods, a key measure of business investment, also declined 0.3%.
The service sector, which is about 80% or more of the economy, is doing better.
The PMI Services Index for December increased to 52.8 from 51.6. This exceeded expectations.
The ISM Non-Manufacturing Index for December increased to 55.0 from 53.9. Again, this was above expectations. Survey respondents were optimistic about an end to the trade conflict with China, but they said that they still have trouble finding qualified workers for job openings. They reported a decline in employment.
The labor market continues to look healthy heading into Friday’s Employment Situation reports.
The ADP employment report estimated that 202,000 private sector jobs were created in December. Also, November’s estimate of 67,000 jobs was revised higher to 124,000. Most of the growth was in medium- and small-sized businesses. Only 29,000 jobs were added in goods-producing businesses, and all of those were in construction.
New unemployment claims declined by another 9,000, bringing the total to 214,000. The four-week average also declined. Most of the surge in claims that occurred in early December has been erased. But because of people remaining unemployed after filing their initial claim, the number of unemployed is at a one and one-half year high.
The Markets
The S&P 500 rose 0.80% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.81%. The Russell 2000 declined 0.22%. The All-Country World Index (excluding U.S. stocks) added 0.22%. Emerging market equities increased 0.40%.
Long-term treasuries rose 0.93% for the week. Investment-grade bonds lost 0.18%. Treasury Inflation-Protected Securities (TIPS) added 0.29%. High-yield bonds gained 0.22%.
On the currency front, the U.S. dollar increased 0.85%.
Energy-based commodities declined 0.37%. Broader-based commodities rose 0.04%, while gold gained 2.83%.
Bob’s News & Updates
Join Me for the Orlando MoneyShow, February 6-8, 2020, at the Omni Orlando Resort at ChampionsGate. I will be speaking Thursday, Feb. 6, 11:30 a.m. about Important Changes in IRAs and Other Retirement Planning Strategies You Must Know. On Feb. 7, I will talk at 11:30 a.m. about 10 Questions You Must Answer Before and During Retirement. Other investment experts who will be speaking include Hilary Kramer, Bryan Perry and Mark Skousen. Register by clicking here or call 1-800-970-4355 and mention my priority code of 049320.
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I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.
