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Passed Pawn Advisors January 2020
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Passed Pawn Advisors

A next generation digital investment advice firm utilizing the latest methodology and technology to create sensible and affordable financial solutions for our clients

Quote Of The Month

We are working diligently with national and international public health partners to bring this outbreak under control as fast as possible.”

-- Dr. Tedros Adhanom Ghebreyesus, Director-General of the WHO

Economic Highlights

  • The Fed left interest rates unchanged at the January meeting and maintained its neutral stance, as expected, but Fed futures market prices in 50% chance of another cut by the summer

  • US Corporate earnings have shown slower growth, but remain robust

  • US employment growth have also slowed, but remained positive.  US holiday sale rose 4.1% over the previous year.

  • The interim “Phase 1” trade accord with China has been reached, boosting global equities.  Brexit is finally done, and Britain and Europe move on.

  • Serious military escalation between US and Iran, and the Wuhan Coronavirus outbreak are two “black swans” affecting the markets

Market Highlights

  • US Equities had a volatile month, with S&P 500 Index closing the month flat

  • Most major foreign equities dropped, with Emerging Markets leading lower by -4.7%

  • US high-grade bonds added 1.9%, and Developed Markets bonds added 1.1%, on flight to safety

  • US REITs were also up 1.2%, as were inflation-linked bonds, both foreign and domestic

  • Commodities tumbled -7.4%, led by oil’s -15.6% crash, in Coronavirus economic fallout, while gold jumped
    4.7%

Observations and Expectations

In 2007, a finance professor Nassim Taleb wrote a book introducing the term, black swan. The bird’s natural rarity and alarming appearance became a metaphor for an unpredictable event outside of normal expectations with potentially grave consequences. The 2008 financial crisis made the black swan a household term, largely proving his theory. Since then, the markets have seen a number of them, all coming in the form of natural disasters, unexpected geopolitical changes, military conflicts, economic crises, and deadly virus outbreaks. By definition, black swans are rare and typically far between. Well, in January we had dealt with two.

First, a fast and furious military escalation between US and Iran threatened to become a large-scale military engagement, possibly engulfing the entire Middle East region. Luckily, the crisis was averted for now, although not before innocent lives were lost when Iran accidentally shut down a civilian aircraft. Then a few weeks later, the world has learned about the newest threat from China, the Wuhan Coronavirus. Both events are impossible to predict, both are very difficult if not impossible to model, and both have the potential of wreaking havoc on global economy and financial markets, aside from the obvious tragic human side of it. And while the Iran situation is contained for the moment, the Coronavirus is far from it, and its consequences will take time to be fully flashed out. More on this in our Question of the Month.

On the positive side, however, the three big questions going into the new year have been positively resolved. The US and China signed Phase 1 of the trade deal that, while not robust, puts an end to the tariff war and promises to lead to a meaningful and hopefully lasting agreement in the next phase. The dreaded Brexit finally happened after years of uncertainty, which now warrants attention to the opportunities within the UK and in Europe. Lastly, the US corporate earnings for Q4, as reported so far, have been beating expectations, despite some dire predictions. The markets have been challenged, but responded well under the circumstances, offering some optimism for the near future. Aside from the looming epidemic crisis, the rest of the earnings as well as the early US Presidential primaries will get the lion’s share of attention of US investors in February.

Sector Update

Energy sector once again finds itself in the “Avoid” category. Add the unprecedented drop in demand due to the Coronavirus to its woes. The continuing proliferation of impact and socially responsible investing adds further pressure to the sector.

Utilities are rarely the sector that appears in the bullish column. Yet its combination of domestic focus, little effect from economic changes, and a safety of considerable dividends were too much for investors to resist lately. It’s the second best-performing sector in the S&P year-to-date and over the past 12 months (after Technology), and 4th over the past 3 years. Expect more of the same in an election year with black swan sightings.

Market Data

Want to see a market snapshot and all your favorite stocks in one place? Try our market data pages.

Question of the Month


This is where we answer the best investment question we’ve heard all month. If you’d like your question to be considered, please send it to us.

Question

How can the Wuhan Coronavirus affect my portfolio and what should I do about it?

Answer

This question, in one form or another, has been on the mind of most investors.  And if our portfolio is heavy on equities, the likely short answer was, negatively.  The full picture is a bit more nuanced, of course.

First, let’s look at parts of the market that are negatively affected:

  • China.  Duh! The economic fallout is greatest at the epicenter, and may have a lasting effect.  Close neighbors and trading partners, and general Emerging Markets investment vehicles in equities and fixed income also suffered.

  • Hospitality industry.  Hotels, casinos (Macau has been a focus for majors for the last two decades), airlines, and cruise lines are all severely affected.  The last group may be the most profoundly affected with seemingly daily headline risk.  Local movie theaters, restaurants, and brick-and-mortar retailers will also be affected, but there are fewer foreign companies in these industries.

  • Major global exporters.  Virtually every multinational corporation has made China and its large and fast-growing economy their target this century.  Consumer products and industrials will feel the most pressure.

  • Global companies that China supplies.  This could be an extensive list, including but not limited to, technology, industrials, and consumer goods.

  • Energy and materials.  These two are the ultimate cyclical sectors, and they suffer greatly from a sudden drop in economic activity and therefore lower demand.

Now, on the flip side, some areas are getting a boost:

  • Infectious diseases biotech.  Many companies within this group have the know-how to jump into the Coronavirus R&D and may have.  A cure would be an ultimate prize, and investors have taken notice. One of our focus stocks has been Moderna (MRNA) and it belongs to this group.

  • Household and medical product stocks.  The need for basic cleaning and prevention supplies drives up the demand.

  • Utilities and Real Estate.  Domestically-focused, stable and steady sectors are the perfect safe harbor in the eye of the storm.

  • Small-caps.  These companies with largely domestic markets attract investors in times like these, especially in services and technology.

  • Treasuries and municipal bonds.  Again, the theme is safety and no global exposure.

Finally, the question is what to do next. That, of course, depends on the future development of the epidemic.  Unfortunately, there’s little we can use to draw definitive conclusions.  The Wuhan Coronavirus was compared to the two largest viral outbreaks earlier this century, SARS and Ebola.  Ebola was originated in Africa, and while the number of cases skyrocketed initially, the virus was largely contained to that continent and eventually had little global economic effect.  SARS did also originate in China and bore some resemblance to the current situation.  However, the Wuhan Coronavirus already surpassed the death toll of SARS and is threatening more human devastation.  Also, China’s share of the world GDP more than tripled since SARS, and today’s global economy suffers quite a bit more due to the Chinese supply chains.  Even beyond physical goods, Google, Microsoft and Amazon had to temporarily close down their offices in China.

Most analysts and observers expect the so-called 2019-nCoV or the novel Coronavirus to be contained soon enough, and the economic impact to be limited and short-lived.  If that holds true, many beaten down travel and consumer names may be a bargain.  But a true black swan can’t be easily predicted.  If the experts are wrong, the potential risks could much outweigh the upside.  We’d recommend US real estate, utilities and US high-grade fixed income, with select technology and biotech, until the fight with the Wuhan Coronavirus enters the decisive stage.

ETF Education

We have recently added a new section to our website designed to provide educational, reference, and news resources to investors in the growing world of ETFs. Product knowledge, understanding cost and tax structure and how ETF trade works can help investors of all stripes find better opportunities for their portfolios and improve its risk management. Knowing the mechanics of volatility ETFs, for example, could have helped $XIV ETF holders avoid huge losses last week.

Featured Motifs

Motif Investing is an innovative broker that allows you to treat a portfolio of equities as a single unit.  We utilize their platform to offer our clients affordable solutions in thematic investing.

Each month we highlight 3 of our motifs that play on current market themes.


Motif Artificial Intelligence
Risk Profile Moderately Aggressive
Time Horizon Long-Term

The ability to recognize patterns has been distinctly human up until recently. From data search to business decisions, and from security to healthcare to robotics, artificial intelligence has been changing many industries.


Motif Outbreak
Risk Profile Moderately Aggressive
Time Horizon Short/Mid-Term

From common cold to Coronavirus, infectious diseases remain a grave threat to human health and sometimes lives. These companies derive significant revenue from developing drugs and diagnostic tools for their prevention and cure.


Motif Small Business Services
Risk Profile Moderately Aggressive
Time Horizon Mid/Long-Term

Small businesses are the engine of the US economy. This motif combines public companies focusing on small businesses as their core customers - benefiting the economy in the process.

Investing Hot Reads

Model Portfolio

See how our proprietary algorithm creates a customized portfolio just for you

Our Papers


These thematic investing papers provide insights into specific investment topics.  If you follow the subject, you can easily subscribe to them and receive a daily email update.  It's absolutely FREE.

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The materials presented above serve informational purpose only and do not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The author, Passed Pawn Advisors, LLC, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment assets mentioned above. Motif Investing portfolios that may be presented are created by Passed Pawn Advisors, LLC, and are available for purchase through their site.
 
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