An Alternative To Money Market Funds
2019 has come and gone and what a year it was!! The Dow Jones Industrial Average (DJIA), the Nasdaq Composite and S&P 500 indices all reached new record highs as the year came to an end. The Nasdaq led the way in 2019, up 35.2% while the S&P 500 was up 28.9% and the DJIA was up 22.3%. Ames Capital Management’s fund was up over 27% in 2019, outperforming the DJIA and trailing the S&P 500 by a slim margin.
The major indices ended 2019 trading at rich valuations aided largely by the Federal Reserve which cut interest rates three times in 2019. At year’s end, the Nasdaq had a Price Earnings ratio (PE) of 28x, the S&P 500 nearly 26x and the DJIA had a PE of 21x. Ames Capital Management’s fund is conservatively managed and its PE is less than half that of the S&P 500.
In many ways, Amazon (AMZN) highlights the risk of investing in companies trading with high PE ratios. AMZN shares reached their record high of $2,050.50 on Sept. 4, 2018. At the time, AMZN had a PE over 330x trailing earnings!! AMZN earned $6.15/share for the year 2017. And in 2018, AMZN earned $20.14/share, more than triple its 2017 earnings. Normally, when a firm triples its earnings year over year, its share price would surge to the upside. Strangely, that was not the case here. AMZN ended 2019 @ $1,847.84/share, about $200 below its all time high due to the plunge in its PE ratio. Yet, at over 90x trailing earnings, its PE is still quite high.
The Federal Reserve is widely expected to stand pat this year, keeping its benchmark rate at 1.50% - 1.75%. Thanks to the annual rotation of voting members, the Fed is expected to be more dovish on interest rates. Fed Presidents Eric Rosengren of Boston and Esther George of Kansas City will no longer be part of the voting panel. They are being replaced by Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari. Both are very dovish. The Fed next meets Jan 28-29, and all meetings this year will be two day affairs.
The major Private Equity firms ended 2019 holding a record sum of cash of roughly $1.5 trillion. Investors seeking higher yields and better returns than what is now offered by fixed income securities have flocked to Private Equity in recent years. In 2019, Blackstone raised $26 billion for a new fund, an all time record. Some other notable funds launched in 2019 include Vista Equity Partners, which raised $16 billion for its new fund while Thoma Bravo raised $12.6 billion for its new buyout fund.
My weekly radio show airs each Friday at 12.30PM EST on WWPR 1490 AM. The show can also be heard live on the station’s website (www.1490wwpr.com). My prior radio shows are available here and columns here.
If you are unhappy with the returns now offered by money market funds, feel free to contact us.