Markets have been in turmoil in recent weeks.
While the S&P 500 ETF, SPY (SPY), peaked just under $294.00 per unit, it now sits at just over $236.00, losing 19.72% of its value since. Even as the Nasdaq lost over 20% with the underperformance of Tech stocks, market headwinds don't seem to be letting up, giving a potential scenario of a continued selloff or sideways movement into the new year.
So what's going on?
There's very little agreement on a single scenario which plunged markets into chaos but the large ones are interest rate hikes and political uncertainty.
Some economic indicators like unemployment and housing data as well as wage inflation (or lack thereof), topped by a ballooning deficit, are showing a potential slow down of the economy as it's been overheating following its recovery from the global financial crisis topped off by an odd statement by the Treasury Department through the Christmas holiday.
On top of that, the Federal Reserve has waited a rather long time for the opportunity to hike interest rates and lower its $4 trillion balance sheet. This has caused credit markets to hiccup, generating greater profits for financial companies but doing very little for consumer and enterprise spending as they have less available cash and higher mortgage rates.
The recent tax cut did help lower class families with the doubling of the child tax credit by $6,000 but recent data shows it did little if nothing to help spending increases by the general population or even by corporations who used it for buybacks (which have somewhat exhausted) and larger bonuses. One thing it has done is balloon the stock market with anticipated spending increases and investments, which is now showing little of it, causing the inflated market to subside. We've seen this in past - ordinary people spend what they have if they get more but the rich and mega corporations just don't since they already have what they need and massive R&D budgets. It gets saved, put in the stock market or goes towards excess 'stuff' which doesn't drive the normal economy or produce jobs.
So, here we are. Markets are on the decline even as the general economy is still churning along quite nicely. Jobs are continuing their winning streak from 2011, unemployment is low, people are buying more cars and houses and even retail is showing signs of relief as the American population goes out more and spends more. But that's all on the brink of collapse as we've seen in the past where the stock market is a pretty good indicator for future economic prosperity. Even if this whole thing may blow over in a matter of days if certain things get back on track, it paints an ugly picture for H1 of 2019.
Looking to the future
Even if you don't believe Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) and Walmart (NYSE:WMT) will run the world in the future there are plenty of companies and industries to focus on in the long run and the ability to pick them up now at lower prices might seem like a winning strategy given valuations and growth prospects.
There are three aspects of the US's future economy which I'm particularly bullish on. Even though they're directly linked to political rationales, I'm going to avoid mentioning them for obvious reasons.
The three industries are healthcare and the implications of a universal or single-payer healthcare system. I'll release a much more detailed article on the prospects of a move to this system in a few weeks, but I'm very optimistic as the overall approval ratings for these types of programs among the general population continues to grow. This has serious implications not only for healthcare stocks but for providers in particular as they adapt to providing unique services and not just act as a broker or exchange managers.
The second industry is environmental engineering. No, this isn't just wind and solar and electric vehicles, although it is going to be a big part of it. It's a whole slew of environmental waste management and alternative energies around the US and globally. Although there may be some differences of approach in different parts of the country, I believe there's an ultimate argument to be had - Oil and gas and coal jobs are being lost regardless of our shift as a nation to cleaner energies so eventually it will be profitable to move over to these new energies and create jobs in a cleaner and more developing field rather than fight to remain in the past while hurting our living spaces.
Third is a continuation of financial engineering. This will most likely appear as computers taking over trading and investment banking but also focuses around the newfound prosperity in the American economic system enjoying higher interest rates, even if they're lower to take care of some of the effects of the recession, and sub-industries that are spurred from these new systems.
A universal healthcare system will likely hurt profitability and revenues for major healthcare transition providers, turning over most of the population's payments into the government and spending going directly to the providers and pharmaceutical companies like most major countries around the world. Although these companies will likely adapt and enjoy a large slice of the healthcare system pie, there's no doubt they will face short term headwinds once a bill is introduced with pressure from the American institutions to seize paying more for getting less out of our current healthcare systems.
Some major drug manufacturers have already slumped enough to justify lower revenues as the US's collective bargaining power increases with a single-payer system, so an investment at these price ranges can greatly outperform general market downturns. My favorite companies include Teva Pharmaceutical (TEVA) with its massive generics presence which will have less of an effect given their starting prices and other diversified ones like GlaxoSmithKline (GSK) which have a wide variety of products and services.
There's a speculation to be made that the healthcare industry will go through a much wider consolidation phase, like similar industries, once collective bargaining power is adapted through a government system. It's key to look for companies with large stockpiles of cash and the ability to continue and generate such to determine which ones will be the buyers and long term beneficiaries versus a smaller player which will likely get acquired and its long term potential lost to investors in the short term.
This one is tricky given the diversity of companies out there that handle both alternative energy resources and utilities and pure waste management stocks which tend to perform equally well even during market downturns. Given the crash in the oil markets, I will, however, focus on a company which has a lot of exposure to the alternative energy markets in wind and solar - Pattern Energy (PEGI). The company works both in wind and solar and has projects across the country and internationally.
A fantastic article on the full scope of the company's business can be much better sought by reading Thomas Lott's wonderful article Pattern Energy: Beaten Up Growth Stock Trades At Only 12.5x Cash Flow, Yields 8%. The company's share price has remained stagnant over the last few years, heading down within a rather narrow range until collapsing in 2018 after environmental regulations stiffened the increased revenues from smaller players and limited spending increases in alternative energies as the Oil market boomed.
The company's future is rather bright with an increased focus of individuals and enterprise spending on alternative energies and I believe the company is well positioned in the right market domestically to enjoy a larger market share than other players in the similar field, focusing on both wind and solar as utilities.
To be completely honest, it'll be hard to go wrong with a well-established bank like Wells Fargo (WFC) given their underperformance compared to other banks since the global financial crisis. The bank is large enough for me to be certain it will be around in the next 10 years in some shape or form and at a higher capacity of operations than it is now as the population grows and the mega-bank continues to invest in new services infrastructure both domestically and abroad.
Even as key areas like algorithmic trading is happening in most major financial players, it's hard to see which companies and startups will get passed the competitive firewall on these new ways of conducting financial transactions. It used to be said that PayPal (PYPL) will control a considerable amount of transactions, then it was Bitcoin for a brief moment, and some would rather hold companies like American Express (AXP), Visa (V) or Mastercard (MA) for the purely transactional aspect of the financial world as exposure to the economy.
I prefer holding a combination of Wells Fargo and some new technology-oriented companies like Cardlytics (CDLX) since exposure to new tech and algorithmic trading is not possible without private equity stakes in high-tech hedge funds and the likes. Cardlytics leverages all the transactional data in banks and other financial institutions to better gear advertisements towards consumers. This is definitely a technology company but its core operations strategy is enough of a financial-analytical one that I feel comfortable linking the two together. I believe a combination of Wells Fargo and Cardlytics can successfully leverage where financial engineering is going until some major algorithmic trading startups begin to go public (if at all).
You can read my full scale analysis on Cardlytics and the way they're transforming advertisement targeting in my first initiation article.
An honorable mention - Amazon
Can't end a buy-the-dip, future-economy prediction article without mentioning Amazon (AMZN). The tech and retail behemoth has such a concentrated role in our current markets and economic systems it's all but guaranteed to stick around for the next few years, even as more and more competition throws massive amounts of money at trying to replicate its success.
With the company's venture into different industries, it's not unfeasible to see the company a major part of the future healthcare delivery system with their Prime membership assisting doctors and prescription services beyond what they do now. It's definitely not unthinkable to see them continue their cloud leverage in the technology and retail space to offer a much more price-efficient and consumer-oriented service in the environmental and financial engineering aspects if they do indeed grow big enough, which has its own problems.
Therefore, an investment down here under $1,400.00 per share in Amazon can add a general hedge, if you will, to the overall competitive landscape of the industries I mentioned earlier. Even as questions about the company's profits and margins surface as incoming competition and higher costs project a rather unsteady revenue growth environment, it's hard to go wrong at current valuations if you look 2-3 years into the future and what basic valuations like EPS and Revenue multiples are expected to be.
Investment Theory Conclusion
Even though market uncertainty and downward catalysts persist in the global financial markets, there are plenty of opportunities worthy of consideration at current levels as most indexes enter a bear market, losing around 20% of their value.
When looking to the future, there are certain industries worthy of taking a look at as prices become attractive. Notably, the field of healthcare, environmental engineering and financial engineering are looking particularly well suited for a long term investment as a global shift of government and enterprise spending occurs. Both China and the US are focusing their investments, at least on the enterprise side, in the future of the populations' spending sprees and looking to lower overall costs of producing energy and services for their respected citizens. China, for example, has invested well over $1 trillion into its environment, healthcare and financial programs since 2014 and spending as an annual % of GDP in the US will continue and rise in the upcoming years.
Looking at companies like Teva Pharmaceutical as a potential winner in the price of drugs war as they focus on generics, Wells Fargo and Cardlytics for their financial engineering efforts and relative price multiples and Pattern Energy for wind and solar engineering and projects should create a nice investment platform to hold for the upcoming years among other names you might want to pick up in this current market downturn, however long it may continue.
That's Warren Buffett's real secret - It's not entirely about the right decisions and the right companies at any given time, it's about being liquid during market downturns and being able to snatch up valuable companies at lower prices because the faith in the capitalistic system remains intact, even if short term headwinds persist.
Disclosure: I am/we are long AMZN, TEVA, PEGI, WFC, SHORT SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.