S&P 500 New Highs and IPOs

04.26.2019

Greetings & Happy Spring.

We hope this brief note finds you well and looking forward to summer. So far 2019 has been very kind to investors who hung on during the 4th Quarter 20%ish decline. For an in-depth look at the 1st Quarter 2019 Markets, along with a supplementary article, click here

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Earlier this week the S&P500 eclipsed last September’s all-time high. It took only 80 trading days since the December 24th bottom to reach those new highs. That’s the 2nd fastest rebound to new highs (from -20%) in 29 years, eclipsed only by a 35 day turn in 1998.

These sharp pullbacks are a welcome aspect of market cycles. To review, we lowered our equity exposure late last July, put those assets back to work during the October pullback and then added again as we fell another 10% the week before Christmas.In all, across our core accounts, we added 20% to stocks as prices fell during Q4. That put our portfolios at their highest equity exposure of 2018 as we entered the New Year.

We discuss the power of Fear vs. Greed a lot in our market notes. The bottom line is MARKETS CAN & DO OVERSHOOT.Most of the time the financial markets muddle along in a generally positive direction. But every once in while things go haywire and emotions lead to extreme movements.

The week before Christmas the markets were priced for a disaster. Disasters have a funny way of not happening.Accordingly, we took advantage of lower prices and bought into that extreme fear. As the markets rebounded sharply during this last quarter, we reduced exposure to equities…taking profits from those Q418 buys. A few weeks later, as we’re hitting new highs, the current market is arguably priced to perfection.

We don’t expect a market meltdown – those are rare, but welcome. Typically, the summer provides volatility and we’ll look to take advantage when it arrives.

We are currently chest deep into earnings season.In the last 24 hours, Amazon, Microsoft, Facebook & Ford announced very solid Q1 earnings results. However, 3M, UPS, Caterpillar & Intel had dismal results. That is typical of earnings season…mixed signals. There is never a bell that gets rung telling us ‘all is well’ or ‘bail out now’. So, we look forward those inevitable periods where emotions push the markets to extremes.

On a separate note, over the last few weeks we have had a few high-profile Initial Public Offerings (IPOs): Lyft & Pinterest.Most of you know that Lyft is a smaller competitor to Uber, the global ride-sharing service. The LYFT IPO had massive hype and we received several inquiries about whether we should buy it, etc.

To be clear IPOs are very risky. The truth is, over time, 1/3 of all stocks go to $0. IPOs are seldom designed to be a benefit to buyers of the ‘new stock’ when it hits the market. In LYFT’s case, the week before the IPO, the company was valued at $15B.Amazingly, b/c of the Wall Street hype machine, among other reasons, by the time retail investors could buy it on the open market, LYFT was valued at $25B. So, magically $10B was created out of thin air. That first day of trading the stock topped at $88/share but was in the mid-$50s 2 weeks later, down over 36%.

Our point in sharing this is to simply remind you that if there is a ‘great IPO’ it should be great for many years. When it comes to new issues patience is typically your friend. Either way, there is no free money when it comes to Wall Street, and we like to see a solid track record for a few quarters before considering exposure to a brand new public company.

Please never hesitate to reach out with questions or concerns.

Thank you,

Your LJI Team