Truth about U.S. stock investment conveyed by Shigenobu Kawada: "U.S. stock investment course trained by the media" [Vol.33] delivered February 7, 2022
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The Truth About U.S. Stock Investments
Shigenobu Kawada's “Training in U.S. Stocks through the Media”
［Vol.33］ February 7, 2022
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*** Table of Contents ***
Market Review
This Week’s Picked Articles
【U.S.-Led Order Will Not Return Twice: Tech Giants as a Threat to Democracy】【FINANCIAL TIMES: Japan Reviews Border Measures; Asia Business Editor Leo Lewis】【High Schoolers Learn Investing; Professionals on Tour — Financial Education Becomes Mandatory This Spring; First, Teachers Need Knowledge】【U.S. Stock Margin Trading to Be Allowed in July; 1,300 Large-Cap Stocks Only, Strict Customer Standards】
Kawada’s Stocks to Watch
Investment Tips
Kawada’s Walk
A Little Guide: “Tips for Steady Asset Formation”
About Activities
Q&A Corner
Achieving 20 Million Yen: Pace Setter
Source: Financial Services Agency; ExeTrust Co., Ltd. based on asset management simulations
※The figures above are only simulations and do not guarantee future results. Fees and taxes are not considered.
How to Read: Assumed Return and Target Year
3–4% yields take over 30 years with wrap funds or balanced funds
5–7% even 25 years with non-U.S. stock funds
8–10% about 20 years; based on a modest rise in the S&P 500
S&P 500 Performance (dividends reinvested, 1970–2021)
Aim to reach 20 million yen early with proper risk-taking
Kawada’s message is remarkably simple. For achieving 20 million yen, let your surplus funds work as efficiently as possible. It is important that participants correctly understand risk and reward. Before reading the weekly newsletter, glance at this table to confirm the correct investing mindset.
Now, start the countdown to 20 million yen right away!
Online Salon “Wealth-Building School Where Dreams Come True”
This online salon is for learning and mutual inspiration to help you succeed in asset formation. It offers member-only seminars that convey content beyond the popular newsletter “Training in U.S. Stocks through the Media” and lets you experience the appeal of U.S. stock investing.
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1. Market Review (Jan 24 – Feb 4)
＜Major Indices＞
・Dow Jones +2.4%
・S&P 500 +2.3%
・Nasdaq Composite +2.4%
＝ Snapshot Version ＝
Following the FOMC, March rate hikes became almost certain. In January, market moves were unstable due to policy uncertainty, but as real rates stabilized, investor focus shifted to corporate earnings, leading to buying of strong-earnings names.
＝ A Little More Detail ＝
Ahead of the FOMC, caution caused volatility, with the S&P 500 intraday dropping more than 10% from recent highs (though close was under 10%). After the FOMC, March rate hikes were almost certain, but markets had priced it in, and long-term yields settled.
Corporate earnings peaked, about 80% beat expectations, but some names, like Meta Platforms (formerly Facebook), fell sharply after missing estimates.
The January employment report on Feb 4 beat expectations, and revisions for November and December were higher, pushing long-term rates up again; however, earnings announcements drew attention and limited the market impact.
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2. This Week’s Picked Articles
A column selecting information useful for asset formation from what I’ve gathered, ranked, with very personal commentary.
【1】 Nikkei NewspaperU.S.-Led Order Will Not Return Twice: Tech Giants as a Threat to Democracy
Ian Bremmer, President of Eurasia Group 2/4
Three years into the battle against viruses, the growing influence of giant tech companies, and the fierce contest between the U.S. and China—global dynamics are changing at speeds and scales beyond imagination. What shape will the world take in 2030? We asked Ian Bremmer of Eurasia Group to interpret the coming decade.
Ian Bremmer
With a PhD in political science from Stanford, Bremmer founded and chairs Eurasia Group, a pioneer in global political risk analysis since 1998. He interacts with political and business leaders around the world, including the U.S., Europe, and Asia. 52 years old.
The following are questions from Nikkei commentator Mikio Kanno
①The U.S. and China are tense over Taiwan, and the U.S. and Russia over Ukraine. How do you see this?
② By 2030, who will shape the world’s rules? Will U.S.-led order continue?
③ Will there be too many rules that cannot harmonize globally?
→ From now on, different types of participants will set rules for each issue. The most problematic area is technology: rules will be set by companies. Digital participants will exercise autonomy in the virtual world, while government sectors will have little influence.
If this trend continues to 2030, governments of many countries will share power with a handful of firms. Firms will truly control data and related aspects of sovereignty.
④ (If we are entering an era where we do not have a single, consistent global order, but rather) would this be good for humanity?
⑤ Politics is urgently strengthening regulations on these tech companies, but…?
⑥ What would ordinary people think? If giant firms become as oppressive as states and widen inequality…?
⑦ Do you think democracy around the world is under threat?
⑧ By 2030, the economies of the U.S. and China are expected to be on par. Both face growth headwinds—who will prevail?
⑨What is the future of energy? For now, a scramble for fossil fuels is underway. Will the world steadily move toward a circular economy?
⑩ If Donald Trump, who denies climate change, were reelected president in 2024, could that be said?
⑪ By 2030, what will be the role of artificial intelligence (AI)? Potential uses include arming weapons and determining personnel evaluations.
【Kawada’s Comment】
He answers future global challenges succinctly. A key point to keep in mind when facing the markets.
“U.S.-Led Order Will Not Return”
What’s interesting is the title’s claim that the U.S.-led order will not return, and Bremmer says this “with very strong certainty.” Why? Because “the United States is so divided that it cannot reasonably wish for it to return,” and “China won’t align at all, and its emergence is too large.”
Is the world’s democracy under threat?
Three reasons why democracy in the U.S. is deteriorating
① The United States is a country supported by strong entrepreneurship, the private sector, and individualism. → If people feel they work hard but are not rewarded, anger at perceived unfairness grows.
②Racial inequality is not being addressed. By 2045, whites are projected to be a minority.
③ It has powerful media companies and social media, and individual influence is strongest in the United States.
The United States is not the world, but the current reality is that U.S. influence remains overwhelmingly large. Still, as Japanese readers, be aware that information from Americans often passes through English/UK filters.
The share of U.S. stocks in the world stock market is roughly 60%. At the same time, the United States’ share of world population, GDP, and military power is far from 60%. Quantifying soft power is impossible, but the U.S. influence on world geopolitics exceeds what Japanese media convey. Bremmer’s observations are therefore valuable for interpreting current global affairs.
【2】 Nikkei NewspaperFINANCIAL TIMES: Japan Reviews Border Measures; Asia Business Editor Leo Lewis2/4
Prime Minister Fumio Kishida, in his January 17 policy speech, stated, “We will promote Japan’s appeal to the world, including registering cultural resources such as sake, shochu, and awamori with UNESCO.”
This promise seems unlikely to be realized. Considering Japan’s COVID-19 situation and politics, Japan appears to be rapidly losing its appeal, slipping into negative territory.
(Many foreign entrants) may have abandoned entering Japan. Moreover, at the Tokyo 2020 Olympics held in the summer of 2021 after a one-year delay, thousands of athletes, team members, and organizers were exceptionally allowed entry, which many found displeasing.
[Kawata Comment]
Currently, entry of foreigners is strictly restricted, but there is a theory that “the Japanese government is secretly conducting an experiment to see what happens if it does not admit immigrants.”
And “scholars warn that rejecting foreign researchers and scholars will not only have long-term negative effects on research, but also make it impossible in the future to attract excellent talent from abroad to Japan. There are also concerns from financial professionals that strict entry restrictions could cause Japan’s market to lose attention that it would otherwise have paid,” .
However, as a result of rejecting foreign entrants, “if Japan can somehow get through without falling into a horrific situation, there are those who deeply believe that Japan should actually be delighted, for a Galapagos-like closed country state could be more vibrant and continue to evolve more smoothly.”
The author warns that national isolation would erode Japan’s soft power, though many would disagree.
Nevertheless, if we recognize that our daily life cannot be sustained without using Microsoft or Apple, one might think that physically restricting foreign entry may not be so meaningful.
Our daily life, thinking patterns, and the means and functions to carry out the real economy are already largely tainted by gadgets and systems originating in the United States.
What is it that isolation tries to protect? If we choose to avoid interaction with foreigners ourselves, misunderstandings will likely increase as well. Looking at the Covid-19 outbreak this time, you can clearly see Japanese tendencies toward isolation and a reluctance toward foreigners.
The sentiment: “Isolation is welcome by Mr. Ken Shibusawa”
By the way, just now I received a newsletter from Mr. Ken Shibusawa (the great-great-grandfather of Eisai Shibusawa). Below are fragments.
“Right now, many young people who wish to express a ‘pure feeling’ in Japan are suffering in the dark tunnel where there is no light at the end of the tunnel. These are foreign researchers and students who are being blocked entry by border controls during the Covid era. I was shocked by the many comments received.”
“It may sound a little strange, but when I see others give up on coming to Japan, I feel a strange sense of satisfaction. I made the same decision last July, but since then I have been far happier.”
“I am one of the 370,000 people waiting to enter for more than a year. As you say, we are not parasites. We chose Japan because we have goals we want to achieve.”
“Wishing you luck. After enduring two years of a nightmare, I hope for the next development. I hope Japan is not adversely affected. Treating people as imported goods is unacceptable.”
“Help. I have waited since March 2020. My life is ruined. I have enormous debt. I borrowed to pay tuition and entrance fees. What should I do.”
I don’t know how credible this poll is, but eight out of ten Japanese people reportedly support the entry ban on international students (not quarantines or vaccination). If this reflects Japan’s current social reality, it suggests Japanese people focus only on their immediate concerns and are sliding into isolation, which is worrying. ”
For foreigners, the Covid-19 crisis responses have unintentionally exposed Japanese attitudes toward foreigners. Even if one insists “I don’t hate foreigners,” cross-cultural communication makes it hard for that to be understood that way.
“No such thing as Tokyo International Financial Center”
As a side note, the article includes a passage where the former president of the American Chamber of Commerce in Japan says that continuing entry bans would hinder corporate activity and undermine Tokyo’s efforts toward becoming a global financial center (the “Tokyo International Financial Center” plan) and would be for naught.
Among foreign members of the American Chamber of Commerce, some had high hopes for the realization of this concept, but I think it is inherently unrealistic.
If “International Financial City Tokyo” means a financial city with the flexibility of Hong Kong or Singapore, that possibility is unlikely whether or not there is a Covid crisis.
To become an international financial city, an infrastructure of law and institutions in English is indispensable, as well as tax systems and social infrastructure that would meet the incentives needed to attract people to work there.
Only foreigners or a limited number of Japanese would enjoy the favorable rules of Hong Kong or Singapore; there is no foundation in Japan to accept that now.
Momentum toward Japan’s International Financial CenterSOMPO Future Research Topics 2021 Vol.3
Realizing an Open International Financial Center
【3】Nikkei NewspaperHigh school students learn investing; professionals go on business trips; financial education becomes mandatory this spring; first, teachers must have knowledge 2/5
“If you had bought about 30 years ago Walt Disney’s stock in the United States, what would it be worth now? (1) Twice, (2) 21 times, (3) 119 times.” In December 2021, at a classroom in Kashiwa Girls' High School (Musashino, Tokyo), an employee of Mitsubishi UFJ Morgan Stanley Securities asked students.
Focus on asset formation: From April, financial education will be included in high school textbooks. The new curriculum will touch on features of financial products such as stocks, bonds, and investment funds from an asset-formation perspective to plan lifelong finances.
A home economics teacher in Tokyo said, “I have never used the NISA (Nippon Individual Savings Account) myself, so it’s honestly hard to teach.”
【Kawata Comment】
The teachers teaching it have not used NISA either. How much of a message about the necessity of asset formation can be conveyed to students? Still, this is the reality. If a teacher joined my salon, they might want to convey that to students as well.
By the way, while Disney might have 119x returns over 30 years, since its 1957 release, it has grown even more. However, the recent 30-year performance is not that different from the S&P 500, which makes it hard to cover in class, so the following is for reference.
Disney (DIS) Long-term Log
Disney (DIS) DIS/SPY, relative stock price of Disney and the S&P 500
Over the last decade, the S&P 500 has outperformed Disney.
【4】Nikkei NewspaperShort selling of U.S. stocks to be allowed in July; large 1,300 issues limited; customer standards to be strict2/6
U.S. stock margin trading will be permitted from July. The Japan Securities Dealers Association has been considering the lifting of restrictions and has recently established the necessary rules. Margin trading will be available for about 1,300 large-cap U.S. stocks.
Investors, especially younger ones, show rising interest in U.S. stocks, so margin trading will be introduced. SBI Securities, Rakuten Securities, and Monex Securities will offer the service from July.au Kabucom Securities plans to start in winter 2022. Some major securities firms say they want to proceed cautiously.
【Kawata Comment】
This has been a challenge since I was in charge of foreign stocks at a major securities firm. Thirty years have passed since then. In-person securities firms say they will “consider carefully,” so perhaps online securities led to the system revision?
Fees, coverage of stocks, and the current rule revisions—online brokers have alleviated the frustrations I had when I worked at a traditional brokerage.
U.S. stocks have no price limit, so short-selling mechanisms will be difficult to operate. Recently, Meta Platforms (FB) fell 26% in a single day. With many M&A activities, a stock can double in a day. How should shorts respond in such times?
However, with the introduction of this margin trading system, Japanese investment in U.S. stocks will likely increase further.
By the way, this news has already been circulating last month. Am I the only one who didn’t know? My apologies.
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3. Kawata’s Noteworthy Stocks
In addition to Kawata’s holdings, here is a section that introduces stocks that caught my eye as I review U.S. stocks.
This week’s focus is not a single stock but a summary and comments on the earnings of major tech companies. Specifically, Apple, Microsoft, Alphabet, Amazon.com (Amazon), and Meta Platforms (Meta, formerly Facebook).
First, a quick look at their sales and performance.
Meta: the lone underperformer
As the table shows, Meta is the sole underperformer. Due to weak advertising revenue, it posted its first quarterly loss in 14 quarters, and its forecast for Q1 2021-03 fell short of market expectations. Other stocks beat expectations and reacted positively.
From these earnings, the conclusion is whether they have genuine scale as platforms.
Apple and Microsoft
Individually, Apple benefited from iPhone sales and grew paid services such as music and gaming subscriptions, which contributed to strong results. The growth in subscriptions indicates that Apple’s paid services are becoming a life platform.
Microsoft’s notable point is its Azure cloud service. The year-end December quarter grew 46% in revenue for the segment, and cloud services form a major portion of the company’s sales and are expected to accelerate further.
Alphabet and Amazon
Alphabet’s core search business benefited from strong online ads, and its cloud business, a focus area, also grew steadily. With ongoing M&A, the cloud segment’s revenue growth outpaced Microsoft’s.
Amazon’s net income grew substantially more than others, largely because Rivian, an EV startup it invested in, went public and contributed to profits. Excluding that, profits were lower, but it announced Prime price increases, signaling confidence in its core business. AWS also performed well, beating market expectations.
Cloud business is the key
Thus, the three firms above (excluding Meta) have growing cloud businesses, a classic platform model that investors tend to value highly.
Meta shows signs of waning as a platform-based social network. This is evident since Alphabet (Google) and Pinterest show stronger ad performance outside Facebook. Competition with TikTok is intensifying.
Investment strategy
Based on the above, in an unstable market, Apple, Microsoft, and Alphabet look like safe “buy-the-dip” candidates, given their established platform status.
Amazon is a bit more nuanced. AWS growth is expected to continue, but questions remain about profitability in its core online retail business. As noted above, excluding Rivian’s gains, Amazon’s profits were down, so investor reaction would depend on how it handles the future and how its core business performs. If investors have a wide risk tolerance or believe AWS alone justifies current valuations, the same strategy as the other three applies, but patience may be warranted.
Meta requires a longer-term stance. It’s unclear how effective Facebook will remain as a platform; younger generations are moving away from it, and data privacy issues around ads are just one factor. The company’s foray into the Metaverse as a new growth area is still uncertain in scale and competitive landscape. If betting on Metaverse growth, it is likely to be a stock for limited investment.
Stock price chart: 5 years
Apple
Microsoft
Alphabet
Amazon
Meta
Charts provided by TradingView.com
(This section is intended for general information only and does not solicit the purchase or sale of any specific securities)
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4. Investment Tips
This section covers not only “investment methods” and “stock picks” but also “noteworthy indicators and statements” and “social and political movements.”
(This week is a break)
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5. Kawata’s Walk
◇◇Recent and planned shops, films, museums, books◇◇
Recent reads, currently reading, planned reads (1/17)
Tachibata Currency? (Asahi Bunko) Bunko – 1992/12/1; written by Yoichi Funabashi
What is the mechanism of international currency politics that brings about enormous yen appreciation and dollar depreciation… A world-spanning frontline reporter for Asahi explores through the voices of world leaders involved in currency diplomacy at G5, G7 and other international conferences. A globally acclaimed non-fiction work published simultaneously in Japan, the U.S., and Europe; winner of the Yoshino Sakuzo Prize.
Publisher’s information
Contents
Chapter 1 Plaza
Chapter 2 London
Chapter 3 The End of the Nation-State: America
Chapter 4 The Politics of the Yen: Japan
Chapter 5 The Deutsche Bundesbank Order: West Germany
Chapter 6 Tokyo
Chapter 7 San Francisco
Chapter 8 Louvre
Chapter 9 Lessons
Epilogue
Yoichi Funabashi
Born 1944 in Beijing. Former chief editor of the Asahi Shimbun. Has covered as a correspondent in Beijing, Washington, and American headquarters. Won the Bon/Ueda Prize, Ishibashi Tanzan Prize, and Japan Journalists Club Prize. Former president of an independent think tank, Asia Pacific Initiative. Books include “Inside—A Report on China” (Suntory Prize for Arts and Sciences), “Currency Uproar” (Yoshino Sakuzo Prize), “Alliance Drifting” (Shinchosha Prize for Arts and Literature), “Countdown to Meltdown” (Otonomi Nonfiction Prize), etc.
【Kawata Comment】
I introduced this book as a book I planned to read in the January 10 issue of this newsletter. Since then, I’ve been turning pages on my daily commute.
This is a book that everyone in the financial industry should read at least once. And for those who experienced Japan’s late-80s economy, even more so. The memory of a frenzy of real estate and stock prices driven by endless optimism makes you feel as if you were possessed. The Plaza Agreement was the trigger that drove Japan’s money into a bubble economy. This documentary vividly captures the two years and a half of the elite negotiating process.
Anyway, Mr. Funabashi’s prose is outstanding. He writes about the actions and thoughts of major world leaders, bureaucrats, and central bankers with fluency and breadth. The people seem to play roles written in his script. It’s a testament to his writing power.
The bubble burst in 1989, and in just over 30 years since then, Japan’s presence in international economics and finance has faded so much that it’s stunning to some. I am one of those who feel this way.
Below, I summarize with reference to “What Plaza Agreement is” from Japan’s history encyclopedia as a quick guide.Plaza Agreement—What is it?
Plaza Agreement was a 1985 meeting among five major economies including the U.S. to intervene in the currency market to adjust the dollar’s strength. This agreement ultimately propelled Japan toward the bubble era.
By the way, I was assigned to NY in the summer of 1986 and returned in 1991. Japan’s stock market frenzy and the bubble economy did not directly engulf me. Still, when I traveled on business back home, everyone appeared elated and it was hard to hail taxis afterwards without the Tokyo accent lingering.
Plaza Agreement—Background and Purpose
① The War’s Aftermath and U.S. Fiscal Deficit
Ronald Reagan took office in 1981. The U.S. faced fiscal deficits and inflation, partly due to the Vietnam War. To curb inflation, high interest rates and tight monetary policy—Reaganomics—were implemented, which helped inflation but widened the “twin deficits” (fiscal deficit and trade deficit) driven by dollar strength and high interest rates.
U.S.-Japan Trade
Japan exported a lot to the U.S. due to yen weakness, especially automobiles. Reducing the trade deficit with Japan was most effective, so the U.S. sought to reduce the dollar’s strength and the yen’s weakness in its trade relations with Japan.
② Monetary Policy
Paul Volcker, then Fed Chairman, shifted the policy target from interest rates to money supply, implementing tight monetary policy. This pushed both long- and short-term dollar-interest rates above 10%, widening interest rate differentials with other major currencies and spurring a surge of foreign investment in U.S. bonds (dollar buying).
③ Fiscal Policy
Reagan’s administration pursued aggressive tax cuts while expanding military spending to surpass the Soviet Union. This widened the fiscal deficit and further accelerated dollar strength.
Readers who experienced the situation at the time will gain much from simply reading Chapter 9, Lessons, of this book.
From the book’s “Paperback Afterword” (p493): “Fiscal, monetary, and exchange-rate policies of many countries merged into one, forming a formidable international currency politics under the banner of economic policy coordination.” And “Behind it all lay, in spring 1985, the grim reality of the U.S. sinking into debt, and the political need for an international emergency measure to stop its fiscal deficit like a hemorrhage” (p495).
Chapter 9 includes a synthesis: various Plaza strategies criticisms (p424) such as
① “What is called policy coordination is merely PR.”
② The Plaza strategy’s aim is “buying time.”
③ The U.S. government tries to obscure the failures of Reagan’s trajectory with a cover-up operation
④ “The road to hell is paved with good intentions.”
⑤ The Plaza Conference was essentially an irrelevant, meaningless event.
And there are counterarguments to these criticisms. Please read the book for details.
“Currency Uproar” and My NY Assignment
How dollars were drawn toward international money and securities industry
The yen’s appreciation before and after Plaza, and the ensuing bubble, symbolized the culmination of postwar growth, I suppose?
I never imagined working abroad when I joined my securities firm. Yet, after branch sales and headquarters work, I had a two-year study abroad; at our firm, more than ten people a year were sent overseas to study, a larger number than bankers or trading houses. It shows how profitable the securities industry was and how much it invested in talent.
I left for study abroad in May 1985, and Plaza Agreement occurred in September. Even several years before, Japanese securities firms valued overseas money inflows. Japanese money first moved toward Wall Street and established a global footprint. My assignment to NY as head of U.S. stock sales happened during that era.
Back then, most trading was handled by Japanese stock desks; the main players were Japanese staff overseas. When I moved to the U.S., Daiwa America’s staff did not exceed 150, but plans to expand to over 300 were already in place.
Japanese money’s large target was the bonds division. In 1986 December, they planned to obtain Bond Primary Dealer qualifications, hiring many local staff. In the U.S. stock division I oversaw, we were preparing to receive orders from U.S. institutional investors as well.
During my five-year posting, many notable events occurred: Black Monday 1987, the end of the Cold War in 1989, and Iraq’s invasion of Kuwait in 1990 and the ensuing Gulf War in 1991.
This posting became the core of my business career. Without Plaza, I might not have come to NY, and I might not have had such a long relationship with U.S. stocks.
At that time, I did not fully understand the complex relationships among exchange rates and monetary policies of Japan, the U.S., and West Germany at Funabashi’s level. Reading this book makes me realize how immature my own experiences, studies, and insights were. Still, it’s a book that nostalgically recalls participating in a piece of history through stock investment within the global money flow.
For reference: Daiwa Securities History (Daiwa 100-Year History) 2003.05
Remark
① Regular on-site commentary for NY market on NHK General TV
During this period, the heads of U.S. stocks for Japan’s four major securities (Nomura, Daiwa, Nikko, Yamaichi) began delivering market updates live from the NYSE on NHK General TV.
As the person in charge, I rushed to the NYSE at market close and gave live updates from the trading floor. Returning to Japan, my friends joked that my Toyama accent would never fade.
部分 scenes were shot at Daiwa Securities’ NY office. Japanese businesspeople’ travel to the U.S. surged. The show captured the aura of bubble-era Japan around NY and Wall Street well.
③ Working in NY at a financial institution is a path to promotion
In NY I had many interactions with Japanese institutional investors, corporate clients, and even Americans. Money was abundant in Japan, so there were many visitors from Japan for business and training. Attending to them kept us busy with meetings and entertaining arrangements.
I met many influential people during those times.
Around twenty years later, a friend who rummaged through my business card box told me, “Kawata, you’ve already met many central figures among Japanese institutions in NY.” That’s probably because overseas postings, especially to NY or London, send future leaders of international divisions. It reinforced how NY postings shaped my career.
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New Series“This is Perfect! All about Asset Formation Using U.S. Stocks”
Introduction
This time we begin a serialized series covering the essential basics of asset formation. The overall structure is planned as follows.
What era are we living in? Part 1-2
Independent Japanese people and essential asset formation for independence: Part 1-3
Is the stock market only in the U.S.? Part 1-4
Differences between Japanese and U.S. stock cultures
Key characteristics of the U.S. market you should know
What is the S&P 500
Why is the U.S. strong
Recommended investment strategies – Core and Satellite investments
Core investment strategy
Satellite investment strategy
What should I buy?
Sources of information and investing
Episode 5Key features of the U.S. market you should know – Part 6
In this series we have explained factors affecting the stock market such as interest rates and inflation. This time we describe the relationship between the U.S. business cycle and stock prices. The contributor is Makoto Okura, familiar from our website’s “Investing in U.S. Stocks for 40 Years” series.
Business cycle and stock price relationship
2. Reconfirming the stock market roadmap
i) Thinking about the roadmap of the stock market
In the previous piece we noted that the economy has already entered a new medium-term cycle (a 10-year cycle). Now, considering this, what stage is the stock market currently in? The major stock market cycles generally align with the economic mid-cycle. That is, a stock market cycle tends to last about 10 years.
Figure 1 divides a stock market cycle into four phases. Think of it as a roadmap for investors to travel the long journey of investing.
First, the “Liquidity Boom” is the recovery phase from a market bottom. After that, through the “Correction Phase (Transitional)” we move into the “Earnings Boom,” aiming for a peak. Then we enter a “Bear Market,” ultimately reaching a bottom. If earnings booms are long, there can be a mid-cycle pullback and, in some cases, mid-cycle rebound in the Bear Market.
The duration and rate of change in each phase are not fixed. The actual market does not follow a perfectly neat pattern. The roadmap here should be interpreted as an image of market development.
Figure 1: The Roadmap of the Stock Market
② Characteristics of each market phase
A summary of the features of each phase is Figure 2. Roughly speaking, stock prices are determined by the product of valuation and corporate earnings.
“Liquidity Boom” lowers interest rates through monetary easing, leading to a flood of funds into the market, which raises valuations (P/E, etc.), causing a broad rise in stock prices. During this period, corporate earnings are in a bottoming-out-to-recovery phase.
“Correction Phase” sits between liquidity and earnings phases. Due to stimulus, earnings are recovering, but central banks ease policy back toward neutrality, so valuations decline, causing a drop.
“Earnings Boom” is supported by an expanding economy; earnings growth supports stock prices. Returns in this phase are typically modest relative to earnings growth. Monetary policy shifts from neutral to tightening as the economy grows.
Lastly, the “Bear Market” results from tightening financial conditions that embed weaker earnings and economic growth, leading to a steep decline, unlike the pullbacks during bullish phases.
Figure 2: Characteristics of the four stock market phases
③ Where are we on the roadmap now?
So, where are we on this road map? With the Fed’s tapering and moves toward policy normalization, we are likely at the transition from the final stage of the liquidity phase into the correction phase heading toward the earnings phase.
The Fed is expected to raise rates about four times this year (starting in March) and to begin asset reduction at some point. Therefore, this year’s U.S. stock market is likely to experience high volatility until rate-hike pace and asset-sales outlook are more fully priced in.
However, this is still a transition to the earnings phase, not the entry into a bear market. Looking at the S&P 500’s expected P/E around 21x as of December 2021 (historically high), through this correction phase, valuations should normalize to a more reasonable level. In this sense, this year may not deliver the high returns of prior years; a modest positive return for the year would be acceptable. For investors, this is a healthy correction.
After the correction, the stock market should move into the earnings phase. Then investors can potentially enjoy relatively long-term returns in line with earnings growth (dollar terms around 8% annually).
【Makoto Okura】
From Ehime Prefecture. Graduated from Osaka University Economics in 1984. 2005: PhD in Economics from Saitama University. Subsequently worked at Citibank, N.A., Cititrust Trust Bank, Societe Generale Trust Bank (now SMBC Trust Bank). In 2017 established EagleCapital in Kyoto’s Higashiyama. Works with institutional investors including pensions and public funds, and also asset management for high net-worth individuals in private banking. CFA charterholder. Certified member of the Japan Society of Financial Economists.
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6. Quick guide to “Tips for Not Failing at Asset Formation”
Mr. Ryuuichi Motohashi, Financial Advisor, shares important tips for steady, medium- to long-term asset formation.
As a Financial Advisor, people often ask, “In asset management, what is the right core-to-satellite ratio?”
In short, there is no single correct answer.
■ People talk about Core and Satellite…
If we define the core as the central asset for stable returns through diversification, and the satellite as a vehicle for actively pursuing higher returns, a typical benchmark might be core: satellite 70:30 or 80:20. But of course, this varies by investor.
【General image of Core-Satellite strategy】
Source: Nomura ETF NEXT FUND https://nextfunds.jp/semi/article34.html
So this time, I’d like to consider not the asset amount but the operation “style” I tell clients as a FA.
■Two essential investment styles in asset management
Readers of this newsletter are not speculative traders doing short-term trades like day traders, but rather investors focusing on medium- to long-term asset formation. However, while investing, there will be moments of anxiety—this is because investment entails some risk, and one expects some returns in return.
Thus, we can define two investment styles.
Investment as a hobby and Investment as work. These require completely different behaviors.
■ Investment as a hobby
First, “Investment as a hobby.” Relying on information from various media or salespeople, or your own market sense, you invest in individual stocks or thematic funds with a medium- to long-term stance, waiting for prices to rise.
Hobbies are meant to be enjoyable. If it’s interesting and exciting, you invest time and money with enthusiasm. If it goes well, you gain great satisfaction (returns); if not, it’s okay—it's a hobby, and you think you’ll try again next time.
For example, I enjoy golf as a hobby. Even if I invest time and money in new gear and many lessons, I still play recreationally with a score in the hundreds. Yet, when I’m on the lush green, I feel refreshed and want to go again.
Is a hobby like golf or fishing or travel something people actively pay to enjoy?
■ Investment as work
The other is “Investment as work.” This is a disciplined approach to making money work for you steadily. It is, literally, “work.”
Even those who find work uninteresting can benefit: to secure a comfortable future and better quality of life, many should know and implement this approach. Often people equate investments with hobby investing, so they may miss this essential concept. So, what exactly is “Investment as work”?Because it’s work, it requires planning based on future life plans and goals, and then the asset classes and specific investments are chosen. Once started, there’s less excitement and more steady, sometimes dull, management.
It means diversifying across asset classes with long-term investment to manage risk so you don’t suffer large losses mid-way, and to build wealth over time. It’s not about betting that a fortune will be made immediately.
■ Steady asset formation requires the boring “work” of management
But even if it’s dull, the work of managing one’s money is crucial, as it protects living standards and asset value, enabling a richer life for many people.
Work is about earning money through your labor, but in work-based management, money itself should also be made to work effectively.
Typically, “unproductive money” sits in a bank. To make it work, you must give it instructions.
For example, tell some money to take on some risk by investing in U.S. stocks, and tell others to earn steady interest through bonds... You need precise instructions aligned with your risk tolerance and policy.
Note: In the Showa era, a salesperson might tell you to keep working in the office rather than roam; but in work-based investment, emotion has no place—be rational.
For those managing money as a job, the key is not “hunches and guts” about timing, but an investment policy as a financial manager—an investment philosophy, in other words.
Next time, we’ll discuss the viewpoints and key points for both “Investment as a Hobby” and “Investment as Work.”
Differences between “Investment as a Hobby” and “Investment as Work”
Source: Materials from FP Associates Group prepared by the author
After graduating from university in 1998, he began his career in the financial industry at Yokohama Bank. He later became a private banker at a foreign financial institution. The global upheaval of the Lehman Brothers crisis soon followed, and he decided to pursue a career as a traditional financial advisor to teach sound asset management. After about 20 years in the financial sector, he became independent, focusing on independent private banking and wealth management. He is a CFA charterholder and a member of the Japanese Society of Financial Analysts.
Currently, he works as an independent financial advisor, not belonging to any specific financial institution, providing private financial consulting that respects clients’ values.
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7. Upcoming Activities
◇ February 9 (Wed) 11:00 Stock Voice
◇ February 15 (Tue) 20:00Monex Securities hosts “Explain the魅力 of the S&P 500! Asset formation techniques to leverage the U.S. economy”
◇ February 22 (Tue) around 8:15 (phone interview) Nikkei CNBC
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8. Q&A Corner
Reason for purchasing TSE 2631
Question
In the February 3 video, Kawata said he used 40,000 of the NISA 1.2 million yen allowance. The stock he mentioned was TSE 2631, and…
Since QQQ has been described as a core stock, I assumed he was buying QQQ in NISA as well.
I also use QQQ as a core holding. The reason is that I cannot invest large sums each year, so I start with the NISA portion first.
What are the merits of buying 2631 on NISA rather than QQQ? Do you see any risks in purchasing foreign stocks with NISA?
Answer
Both move in almost the same way and have the same economic value. QQQ is foreign stock, while 2631 is Japanese stock, but their economic value is essentially the same. The reason for using 2631 is that it can be bought during weekday daytime on the Tokyo Exchange, which is convenient. The risks of both are the same. I hold more in QQQ overall.
QQQ (blue) vs 2631 (orange) comparison
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