Bad Dream Redux
In our April newsletter, we noted that the gyrations
the market had endured during the previous six months
were only bad dreams as after each sharp decline the
market rallied back to near the highs of the last 15
months. In the quarter just ended, investors were
visited with another bad dream. This time, instead of
recession fears or doubts about earnings growth, it was
a political development, the British vote to leave the
European Union, or Brexit. US stocks tumbled over 600
points in one day. The foreign exchange value of the
pound versus the dollar also fell 15% in the following
days. The Euro fell as well, though to a lesser extent.
World stock markets fell sharply.
Fears were that the post-war international order was
about to unravel. Widespread disruption was at hand.
Treaties between Britain and the EU would have to be
renegotiated, a grueling and lengthy affair. Scotland,
which voted to stay with the European Union, has
intimated that it might vote to split from the United
Kingdom and remain in the EU instead. Other members of
the EU might be encouraged and find reasons to withdraw.
Uncertainty was everywhere. Reflecting that uncertainty,
precious metals, gold and silver, have been the best
performing asset class this year.
But as things stand today, it was once again only a bad
dream. A week later, the US markets had recovered 80% of
their losses. And the week after that, the S&P 500
closed above its all time high. It appears that the US
markets shrugged off the Brexit because it seems to
believe that Britain and to a lesser extent the Euro
zone will bear most of the cost. Britain will likely
enter a recession as its access to the EU will be
hindered. Any impact on the US is likely to be limited
because Britain is a relatively small (4%) trading
Here in the US, growth continues a slow, steady grind
upward. Expectations are for 2.5% growth in the second
quarter. The recent monthly jobs report for June was
stunningly good after a stunningly bad number the month
before, lifting animal spirits and consumer confidence.
Corporate earnings are expected to bottom out in Q2
after more than a year of declines. Should the economy
falter and/or corporate earnings disappoint, the US
market would be vulnerable.
Bear markets approach their bottom when stocks stop
going down in the face of continued bad news.
Conversely, bull markets approach their top when they
get increasingly skittish and sensitive to bad news.
Bears say that we are approaching a turning point. We
agree but donít know quite what to do about it. Markets
have a tendency to rise or fall to extremes. Rallies
tend to go on longer than the bears expect. So we are
One of the reasons stocks have been so stubbornly rising
is because of what is known as TINA: There Is No
Alternative. With a yield under 1.4% for the ten-year
treasury, historically low, stocks with 3%-4% yields
become an alternative. But the case for TINA is
disingenuous. Be warned. Stocks have higher risk than
bonds and on any given day can shed enough value to wipe
out dividends. In a bear market, dividends do not
support stock prices.
Politically, the world has not changed for the better.
The US election will be won by the candidate that has
the least bad approval rating. Racial tensions in the US
are increasing. ISIS continues to terrorize around the
globe. The Middle East simmers in violence. Interest
rates are suppressed by central bankers, which produces
little income for savers and pension funds. The growth
prospects of Britain and the Euro zone are in question.
The Russians remain antagonistic to the West, and China
and North Korea provocative in the East.
2016 has been good to our clients so far. First half
results range from high single-digits to low
double-digit returns. The S&P 500 with dividends
included rose 3.8% over the period. (Past performance is
not indicative of future performance.) Above average
exposure to gold mining and energy shares, which
restrained results in 2015, has proven its long term
After seven years of generally rising stock prices the
market seems picked over. Stocks that are down generally
deserve to be down. Valuations appear to be fairly
valued to overvalued. Earnings growth has been and
likely will remain subdued. Our strategy remains the
same. We are pragmatic: Be willing to take profits, hold
cash positions of around 20% as an anchor against
volatility, and take advantage of sharp declines to buy
if the opportunity presents itself.
* * * *
PR Herzig & Co. has moved to another office in the same
office complex. Our phone and fax numbers remain the
same. The ADV Part II has been adjusted accordingly. The
new mailing address is:
PR Herzig & Co., Inc.
4 Expressway Plaza, Suite 220
Roslyn Heights, NY 11577
Please read our important notice
about these letters and the securities they mention.