Missiles, Dollars, Stocks and Farms
Stocks finally took a step backwards, giving up less than one percent on news of possible hostilities with North Korea. That still leaves the Dow Jones Industrial Average up 11% this year and 3% since the end of June. The broader S&P 500 index has begun to lag the Dow, usually a signal that nervous investors are favoring the blue chips that make up the Dow 30.
In the highly unlikely event that stocks stayed where they are now, an 11% gain would be the biggest since 2013. Stock gains since the November election have dominated the financial news. The American dollar has gone the other way, losing 8 percent since the beginning of the year against a basket of major currencies. A weakening dollar has some benefits as it aids our exports but it can lead to higher interest rates as U.S. bonds lose some attractions to overseas buyers.
Typically, when tensions flare and anxieties mount, global investors traditionally buy American dollars, historically a proven refuge in times of trouble. This time, after the President threatened North Korea with “fire and fury,” global investors sold the dollar. They also did so after Arab nations imposed an embargo on Qatar in June and in July when Russia expelled 755 American diplomats, aggravating tensions between two nuclear powers.
Stock trading volume tapers off in August, sometimes setting the stage for exaggerated price spikes in reaction to global developments. Thursday’s half-point percentage dip in the market averages is a mere blip. More significant are persisting investor expectations that the new Administration will somehow deliver on its promises of tax cuts and increased infrastructure spending.
Meanwhile, we are now less than two months from the October 1 government fiscal year. That will require cobbling together stop-gap spending bills like the approved in May that covered the rest of the fiscal year. The Congress cranked out the current debt limit last March but the non-partisan Congressional Budget Office projected the Treasury will run out of money in early to mid-October.
After the 2016 election, the dollar strengthened, raising concerns that currency crises would strangle developing economies. Instead the dollar reversed, largely aided by policies favoring exports. This created floods of liquidity worldwide, boosting bond and stock prices. These effects can be seen in the recent relative outperformance of the Dow whose components emphasize multinational exporters like Coca-Cola, Caterpillar and Boeing.
Corporate earnings season is ending and, with it, overall favorable results that exceeded estimates. We are three months away from the next round as we enter the historically weak months of September and October. High growth technology stocks have led the markets this year and will probably pause until their next earnings reports. These market conditions favor assets whose price actions are often opposed to the overall market, gold and oil among them.
I agree with Warren Buffett that gold is a lousy investment. He has said, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Land, particularly farmland, makes much more sense but is difficult to fit into investment holdings. Fortunately, Gladstone Capital has launched a new REIT, Gladstone Land (LAND-$13) whose expanding portfolio of farmland exceeds $500 million in value. It buys properties, now in six states, and rents them to corporate and independent farmers on triple-net leases. Earnings are growing, the dividend yield is already 4% and insiders own 17% of its shares. Farms are a welcome change from missiles.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622