Value and Profits in the Mid-Cap


Here’s an investing truth we should not ignore…  “The best times in the economic cycles, are the worst time to invest in shares.”

And right now, the economic cycle is very good.

Let’s review this cycle, the risk and opportunities it creates now.

economic cycles

The current cycle is very mature.  Investors should watch out for:

  • Rising Inflation
  • Rising Bond Yields
  • Falling Unemployment
  • Expanding PE Multiples
  • Rising Short Interest Rates

These factors are leading indicators and signs of  a recession ahead.

How soon will we see a recession?

No one knows, but last week’s Wall Street Journal article “Fed Officials Debate Signal From Flattening Yield Curve: Is This Time Different?”(1)  gave us a warning that rising short interest rates are signaling a rising economic risk.

The article says: The gap between short-and longer-term Treasury yields has fallen to levels last seen in 2007.

We all remember what happened in 2007!

The article says: Atlanta Fed President Raphael Bostic and some of his colleagues are laying the groundwork to slow down the Federal Reserve’s interest-rate increases if they foresee a bond-market development that has traditionally been a harbinger of recession.

At issue is the narrowing spread between short- and longer-term Treasury yields, a difference known as the yield curve.

The gap typically shrinks when the Fed raises short-term rates. But when short-term Treasury yields rise higher than longer-term yields, a so-called inverted yield curve, a recession has almost always followed within a year or two.

Mr. Bostic’s concerns are taking on new urgency because the spread, measured by comparing yields on two- and 10-year Treasurys, has fallen to levels last seen in 2007. It dropped below 0.3 percentage point last week, down from 0.5 percentage point three months ago and 1 percentage point one year earlier.

Screen Shot 2018-07-10 at 5.36.47 PM

“Any inversion of any sort is a surefire sign of a recession,” said Mr. Bostic in an interview last month. “I want us to avoid being in a situation where” the curve inverts.

The debate over how much importance to place on an inverted yield curve could grow more fraught in the months ahead if U.S. economic growth remains strong and global growth falters. That could spur a flight to safe assets such as long-term Treasurys, pushing long-term yields below short-term yields.

A recent Purposeful Investing lesson shared an idea from Eric Roseman, CEO of ENR Asset Management, about an  equity opportunity that makes sense in this part of the cycle.  (Bolds are mine).

Eric wrote: Hunting for Mid-Cap Value in Late Stage Rally

Since last spring, a major market shift has occurred: Investors have dumped foreign assets in favor of domestic U.S. stocks and to a lesser extent, Treasury bonds as the U.S. dollar surges, emerging markets come undone and a full-scale global trade war heads into unchartered territory. Most large-cap American multinationals aren’t the ideal destination for investors as the dollar strengthens and tariffs are slapped on their goods sold abroad. But for domestic enterprises, like small-cap and mid-cap companies, sales are largely insulated from the travails of a global trade spat.

Investors have already picked over the small-cap space as the S&P 600 Small-Cap Index and the Russell 2000 Index continue to hit new all-time highs while the S&P 500 Index remains about 5% below its January 26 high.

Eric then explains that value continues to lag in the mid-cap sector of this bull market. This creates opportunity as we approach the latter innings of this 10-year economic expansion.

Eric recommends the Vanguard Mid Cap Value ETF  (2) that tracks the performance of the CRSP US Mid Cap Value Index.   This is a a broadly diversified index of value stocks of mid-size U.S. companies. The advisor attempts to replicate the target index by holding each stock in the index in about the same proportion as its weighting in the index.

The chart above of the Vanguard Mid Cap Value ETF (dark blue) shows how this fund has fallen far behind the performance NASDAQ Index (light blue) in the past five years.

This ETF represents and easy way to continue seeking value in the over priced US equity market at these late stages in the economic cycle.

Gary

The 70 Year Iron Correlation

Correlations can shine light on reality.   Correlations can help us spot realities that most of the world do not see.  Reality consists of innumerable cycles.  If we can understand a cycle, when it starts and ends, then we can better understand what’s next!

iron lung

The Dreaded Iron Lung

Are there clues in a cycle that correlates the Iron Curtain and the Iron Lung?  If so, what can this correlation help us see?

Every morning I rise around 5 a.m., meditate in the awakening of bird songs and open my mind and heart to correlations.  The connection that came to mind yesterday morning puzzles me. Will you help me think through whether or not I have spotted a clue to what the future might hold?

Russia invaded the Crimean Peninsula this year.   Though the Russians now appear to have backed off,  I think they got the main objective they wanted.

If you are a boomer who grew up as I did during the Cold War under the threat of nuclear devastation, you might still be thinking “Oh, no, not again”!

Polio is a global health emergency again.  Here is an excerpt from last week’s New York Times article “Polio’s Return After Near Eradication Prompts a Global Health Warning” by Donald G.  Mcneil Jr.

Alarmed by the spread of polio to several fragile countries, the World Health Organization declared a global health emergency on Monday for only the second time since regulations permitting it to do so were adopted in 2007.

Just two years ago — after a 25-year campaign that vaccinated billions of children — the paralyzing virus was near eradication; now health officials say that goal could evaporate if swift action is not taken.

Pakistan, Syria and Cameroon have recently allowed the virus to spread — to Afghanistan, Iraq and Equatorial Guinea, respectively — and should take extraordinary measures to stop it, the health organization said.

Boomers who grew up with the gloom and fear of polio and the iron monster lung may be thinking, “Oh, no, not again”.

What is the correlation between Russia in the Ukraine and Polio?

Philosophical author Carolyn Myss (2) writes about national consciousness and how 1929 and the Great Depression left America, “financially crippled”.  She writes:  Crippled – that’s how Americans described themselves in the 1930’s.  In keeping with the psychic nature of epidemics, and epidemics tend to emerge out of a traumatized social event or catastrophe, the polio epidemic struck in the 1930’s, crippling children around the country.  Indeed, America was now completely crippled, from its tribal chakra through to its spiritual crown.

A president was elected during the 1930’s who also a victim of polio – FDR. He was exactly what the collective soul of America needed, a leader who knew what they were going through in terms of being psychically crippled, and yet he was a man of wisdom and strength.

Then she explains how after World War II America was alive again, thriving and “back on its feet again”.  By the 1950’s, Jonah Salk discovered the vaccine for polio.  America was more than ready to not only shed its epidemic consciousness but make an evolutionary leap in consciousness to the “Self and Wealth” generation.

Here is why I need your help!

As I meditated on the Ukraine and polio and the thoughts of Carolyn Myss, I asked, what is this correlation?

Later I this revelation occurred.. Russia began the invasion of the Ukraine in 1921 and formed “The Ukrainian Soviet Socialist Republic in 1922.  The Soviet Republic broke up in 1991.

Franklin D. Roosevelt’s paralytic illness began in 1921 after exercising heavily during a vacation in Canada.

In 1988, the World Health Organization, together with Rotary International, UNICEF, and the U.S. Centers for Disease Control and Prevention passed the Global Polio Eradication Initiative, with the goal of eradicating polio by the year 2000. The Initiative was inspired by Rotary International’s 1985 pledge to raise $120 million toward immunising all of the world’s children against the disease.  The last case of wild poliovirus poliomyelitis in the Americas was reported in Peru, August 1991.

What do these correlations mean?

Roosevelt’s Polio started in America 1921.  Russia began an invasion into the Ukraine in 1921.

The Soviet Ukraine ends in 1991.  Polio is eradicated in the Americas in 1991.

The  Soviets begin an invasion into the Ukraine in 2014.  The WHO (World Health Organization)  declared a global polio health emergency in 2014.

I am intrigued but stumped and would like to brainstorm with you and share your input, thoughts and opinions.  Is this a correlation or coincidence?   If there is a correlation, what might it mean?

The implications and useful ideas on “What’s next?” could be profound, helpful and meaningful from the extrapolations we gain from understanding the relationships of these correlations!  At the least, thinking about this a bit might stimulate our thinking about the future, what Russia and viruses might bring, when and why.

Gary

Correlations help us better understand the National Psyche which can bring fulfillment and wealth.  Learn seven steps to unleashing the power in the National Psyche below.

(1) Polio’s Return

(2) Carolyn Myss on the Polio President

(3) Formation of Ukrainian Soviet Socialist Republic

(4)  Roosevelt’s Polio

(5) Polio Eradication in the Americas

(1) www.wsj.com: Fed officials debate signal from flattening yield curve

(2) Finance.yahoo.com: Vanguard Mid Cap Value ETF


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