We just recently wrapped up the first three months of the year and it did not come too soon. However, there has been some rebound. At my last dispatch in March, the S&P index of 500 stock performance was down more than 12% for the current year. Since then, as of today we’ve recovered almost half of that loss and are down 7% for the year currently. Meanwhile, tech stocks were down 20% last time we talked and have recovered somewhat to be down 16% for the current year.
You may have heard the news about Netflix’s stock price collapsing. Netflix is down so far this year a whopping 64% of its value from just 111 days ago. We are very happy to report that none, zero, zilch of our clients own Netflix stock and it was never part of our core group.
Netflix was never part of our core group because it did not pass all our basic criteria, namely that 1) the company must dominate its market in a growing industry, 2) it has effective and ethical management, 3) it has growing revenue and profit, and 4) it is unlikely to be a victim of changing technology. With regards to Netflix, it has been obvious for years that it has to spend exorbitant amounts to produce a show that customers probably only watch once. And these days, it certainly does not dominate the streaming market. The CEO once remarked that the company’s only competition with its customers was sleep. Apparently, that’s no longer true.
Several clients in our firm do own Netflix bonds. Unlike its stock, Netflix bonds come with a guarantee to be repaid, and we never expect growth from these securities, just interest income.
Speaking of interest income, Market rates have risen this year significantly, as measured by the US Treasury 10-year bond, which started out the year at 1.51% and is now at 2.94%. The Federal Reserve has risen its interest rate used to lend money to banks and is expected to continue. This “taking away of the punch bowl” is not favored by stock investors, but it may prevent a bubble popping in the economy, especially with the real estate market, which some consider out of control. Higher mortgage rates may slow the buying frenzy and help to ease escalation in home prices before speculative buying creates a nasty bubble.
The current price of bonds and bond funds in your portfolio are also affected by rising interest rates. In the short term, as interest rates go up, bond prices go down. This is because new bonds being issued are coming out with higher rates, so the Market favors them over our “old” bonds that pay the lower rate. But don’t get too discouraged over this short-term phenomenon. In the longer term it will balance out: For holders of individual bonds, like the Netflix bond described above, the maturity value is set, no matter how the interim price may fluctuate. And, for bond funds, the fund managers are constantly buying new bonds, so eventually, the fund will own bonds having the higher interest rate.
With interest rates higher, this has created an opportunity for our buying some attractive bonds and bond funds for clients in this area. Decent corporate bonds can once again be found that pay around 5%. We are reviewing our client accounts now for this, but if you want to make sure we don’t forget you, give us a call so we can make a focused effort. Unlike Netflix, we know our competition is more than just our clients’ snooze time.