Despite some hand-wringing over China’s ability to orchestrate a soft landing, a successful near-term resolution to the Greek debt crisis and signs of continuing economic improvement in the United States have helped to keep global equity markets firmly in the black for the year.
Here are some of the month’s most compelling stories:
- In the United States, the sector of the market garnering the most attention of late has been the financials, particularly the banks. Financial stocks have surged in response to improving economic news and, more recently, in reaction to news that most banks successfully passed the stress tests administered by the Federal Reserve. Banks celebrated the news by raising their dividends and announcing massive share repurchase plans. However, at least one observer did not endorse the idea of bigger payouts from the banks. Of course, the most effective use of corporate cash is an age-old debate. This Financial Analysts Journal article from 2003 addressed dividend policy, with the authors finding that earnings grew the fastest during the years in which companies’ dividend-payout ratios were the highest.
- Few investors have benefited more from the run-up in financial stocks than Berkshire Hathaway’s Warren Buffett. The sharp rebound in Bank of America’s share price, up more than 75% since the beginning of the year, leaves Buffett’s investment in the bank’s warrants comfortably in the money. And the Oracle of Omaha’s annual letter to shareholders, widely anticipated each year, was another gem. He addressed succession, share repurchases, acquisitions, and his aversion to gold. Within the Berkshire portfolio, Buffett upped his bet on media, with the latest SEC filing showing purchases of Liberty Media and DirecTV. Positions in Johnson & Johnson and ExxonMobil were trimmed.
- While Buffett has thus far resisted calls for a Berkshire Hathaway dividend, Apple finally responded to calls to share some of its nearly $100 billion cash hoard with shareholders. Dividends and share repurchases have been on the minds of Apple shareholders for some time, and the company finally obliged, announcing plans to return some $45 billion to shareholders over the next three years, including $10 billion through share repurchases and a $2.65 quarterly dividend — its first since 1995. Apple’s share price is up roughly 75% since the previous year, tacking on roughly $240 billion in market cap, approximately equivalent to adding IBM, the fourth-largest company in the S&P 500 Index. While the initiation of a dividend is likely to attract new investors, as a Wall Street Journal article points out, Apple was already owned by funds with a wide range of mandates, including small cap and high yield funds! With all the love being showered on Apple, columnist Holman Jenkins offers some balance with the suggestion that margins could fall sharply.
- The question about upside isn’t confined to Apple’s stock. With the S&P 500 just below its all-time high, how much more the market can climb has been the subject of much debate. The bull case is succinctly put forth by AllianceBernstein, which cites the yield gap between equities and bonds (the “Fed Model”) and the equity risk premium. (For more on the evolution of thought behind the equity risk premium, see this article summarizing the work of Stephen E. Wilcox, CFA.)
- Bears, including GMO’s James Montier, point to peaking profit margins and, as the Financial Times reports, a marked increase in negative first quarter earnings guidance. Strategist Richard Bernstein recently noted the sharp uptick in negative earnings surprises, and fellow strategist Nick Colas at ConvergEx Group points to six potential investment sinkholes that could spell trouble for the market.
Where do we go from here? Swiss investor Felix Zulauf’s somber assessment is that the good times for global markets will soon come to an end. His stance contrasts with the generally positive tone heard at the recent Investing in Emerging Market conference. My colleague Ron Rimkus, CFA, penned an excellent overview of the conference, noting in particular bullishness on Africa as one of the next investing frontiers.
For more news and trends, visit the Equity Investments Community of Practice.