Friday’s US jobs report provided significant respite going into the weekend, as investors worldwide breathed a sigh of relief seeing America’s continued employment progress. With 233,000 jobs added in April, expectations were somewhat met, but definitely not blown away, helping keep Fed interest rate hikes temporarily at bay, and the easy money flowing. However, it’s not worth banking on for too much longer, in our opinion, given continued signs of labor market tightening and inflation rising. Across the Atlantic, European growth data is continuing to impress as well, although Greek negotiations remain an anchor on the markets. Overall, we’re seeing that the developed world is muddling along in the right direction, and believe investors will slowly begin to rotate asset classes, diversify, and turn on the heat in developing regions as interest rate hikes become imminent. Next week, we’ll have a report from South Africa, covering the economic prospects and investment ideas in the sub-Saharan African region. In the meantime, here are two subjects we’re highlighting this week:
The Danger With Bonds: Wall Street has decided to raise the alarm on the bond market over the past few days, with a number of high profile investors stating that a correction is coming. We tend to agree with the herd on this call, since even though the statements are resonating all over the place, unlike normal, the move hasn’t actually occurred yet. Granted, 10-year treasury yields have jumped from 1.67% to 2.2% since February – a massive move in a short amount of time. Yields rise when bonds fall in value, and this change is important to note – especially considering the unnerving volatility last week in sync with the German bond market – another region with unsustainable yields. The 2.2% yield is still far below the pre-recession era of 4% or higher. Add to that CNN Money’s fact yesterday stating that ‘the value of the worldwide bond market plunged more than $430 billion since yields began to soar last week’. These are significant numbers, especially when we consider that bond investors as a group aren’t really the thrill-seeking type. They usually prefer stability and safety – and this same bunch has moved into high yielding bonds over the past few years, given that that asset class has been one of the few sources of measurable return in fixed income. When safer horizons come calling with interest rate hikes, there will be a lot more ship-jumping than what is currently factored into bond prices, in our opinion. Forbes’ William Baldwin goes as far as to call the possible correction ‘a disaster waiting to happen’. We highlighted our concern on high yield bonds in our May 4th column, and believe the entire bond asset class is worth treading extremely carefully in the coming weeks.
The Power Of Data: We switch gears here, from asset classes to structural trends. With terms like ‘Big Data’ and ‘the Internet of Things’ being thrown around left and right during conference calls and visionary talk, we decided to chime in this week on the subject. In fact, let’s make it simple. While Wall Street continues to value Facebook, Google, and other tech companies around their advertising cash flows, we prefer to think of them as data gold mines. Why? Because Netflix knows more about your viewing habits than you probably do yourself, while Facebook can probably tell what you like, what you don’t, and what you’re thinking before you probably do. Be it shopping, eating, spending, or saving habits, we believe that the companies thriving on consumer emotion will start giving the traditional ratings and research agencies, such as Nielson, a run for their money. Other major, undervalued data hubs? In our opinion, it’s the credit card industry. Who better to dissect your spending than companies such as American Express, MasterCard, or Visa? The latter handled transactions over $6.8 trillion last year, according to The Nilson Report – to put it in perspective, that’s nearly 10% of the world’s GDP (from the CIA Factbook). Granted,the companies mentioned above have had phenomenal stock runs over the past few years. The structural theme, however, isn’t going anywhere. As ETFs of all types crop up for investors – passive, active, smart beta, geographic, etc., we look forward to a ‘data-centric’ ETF, which compiles companies that thrive off of the information from consumers. Take the example – Fitbit filed for an IPO last week to raise over $100 million. In a few years, it knows that the data from counting steps will be a lot more valuable than simply winning walkathons or corporate step challenges. That thought process is definitely a track worth walking on.
What it means for you: Outsmarting Wall Street isn’t easy. Many try, and judging by average individual historical returns, most fail (to beat the market). Noting the hints from the smart money, however, is much simpler. As every corner of the world continues to deliver market-moving news daily, right from US interest rate hike projections, European growth data, Chinese market volatility, and Arabian oil ministry comments, it’s important to maintain focus, stay alert regarding your assets, and invest in the structural themes. Short-term news, in our opinion, is like turbulence. It can hurt the aimless wanderers chasing returns down the aisles, but if you chill out and wear a seatbelt, the only effort needed is holding your wine glass steady for a few seconds. In a few minutes, it’ll be as if nothing happened, and given the impeccable safety record of planes during turbulence, you’ll reach your destination absolutely fine. The stock market, in the long term, isn’t all that different.
