Global stock markets are trading near their highs and holding steady since our last post, mid-summer. Bond prices have generally held their gains off their early year lows. Global economies continue to grow modestly. As well, markets don’t seem to be reflecting much concern over confused expectations for tax reform or fiscal stimulus. Repatriation of overseas profits still seems to be an expectation. Many are expecting an autumn pullback, and market sentiment indicators seem to be tipping towards some sort of modest correction. Right now it doesn’t feel like there’s any action to be taken, although it’s always important to be on the lookout for longer term shifting trends in the economy and markets. We think broad diversification in and within asset classes is more important than it has been since the market bottom in early 2009.
Well, we’ve had a nice run in the U.S. stock market, especially if you look all the way back to the bottom in the spring of 2009. The question on most investors’ minds is whether it’s time to re-balance, or not. As we noted in our post at the end of the year, the important things to pay attention to this year are; the Fed, politics, and the economy. So far, so good. The economy continues to improve, the market is absorbing big changes in the political structure without much disturbance, and the Fed seems to be holding it’s line on rate hikes. So, although there seems to be no compelling reasons to change strategies at this point, re-balancing portfolios has more to do with preparing for the future than reacting to current conditions. There are two futures to prepare for; yours and the market’s. Our clients tend to fall into three general age categories; Emerging Investors (20s-30s,) Peak Earners (40s-50s,) and Retirees (60+.) Each age group should respond just a little differently than the others to the need for investment re-balancing. Emerging Investors probably need to be least concerned with re-balancing. Once their long term allocations are set it becomes more […]
Predictions are often easy to make, but even the best researched and considered predictions are often 180 degrees wrong. So for that reason, we are reluctant to make New Year predictions. However, what is important is to figure out what are likely to be the biggest influences on the markets in the coming year. It’s an especially good idea to consider macro factors this year because markets have made dramatic turns around the recent elections. Domestic stocks indices are at new highs (up from highs set last Spring) and bonds are now testing the lows of summer 2015, after reaching record high prices this past summer. We’re thinking the big 2017 market influences will be: The Fed Politics The Business Cycle The markets could be facing real headwinds if the Fed decides to get aggressive in its efforts to head off inflation. Politics are important here because a surge in economic activity due to fiscal stimulus, should it lead to an acceleration in wage gains, will almost certainly force the Fed to raise rates more rapidly. Of course, the result will be lower bond prices and, probably, lower stock prices. Conversely, should fiscal stimulus efforts get stuck in congress, or […]
We’re in the midst of a very large market rotation based on several anticipated economic policy changes. Although the President-elect is not easy to nail down, his economic cabinet and other leadership choices are pointing to less bank and business regulation, lowered corporate taxes, and economic stimulus. Bond prices are down significantly as big investors, fearing inflation and higher interest rates, exit fixed income. Stock managers are rotating out of healthcare (lingering fears of pricing pressure,) interest sensitive stocks (like utilities and REITs,) and tech stocks, just because they need cash to chase industrials and commodities, as beneficiaries of fiscal stimulus (infrastructure spending,) and banks as beneficiaries of higher interest rates (making loans more profitable.) If we get signs that all this leads to increased economic activity, more employment and higher wages, more capital investment, and more bank lending, we think current stock prices can generally be supported. Although there may be moments of doubt and fear, given the above assumptions, we would probably see those moments as opportunities to add to quality stocks, especially if the sector rotation continues to be so robust. However, the going looks difficult for bonds.
July and August were good to stock investors after the Brexit dip. In the end, Q2 earnings came in mixed. That is; some stocks in each sector turned in good earnings and some stocks in each sector turned in not so good earnings. The market seemed to like most of it, and the S&P was up nearly 10% off the July low. Then, this week, we hear from the Fed that the second interest rate hike is imminent. There was a bit of a delayed reaction, but market participants seem to agree, all at once, that stock and bond prices need to get cheaper. The S&P is off by 2.3% and small caps by nearly 3.3% as I type. We suspect the weakness will continue a bit as the market continues to adjust to the not-so-new reality of a rate hike. It’s a good time to look at our allocations to stocks, bonds and other interest rate sensitive investment to see if we’ve gotten too enthusiastic about any asset class or sector; if we’ve got any positions we’ve become concerned about longer term; or if we’ve got any positions that have had big moves that we may want to trim. The […]
Almost 10 years of near zero interest rates has ended with yesterday’s FOMC announcement. Short term rates will rise to 1.375% next year from .375% right now. And, rates will go up 1% again in 2017 to 2.375%. The FOMC has left some wiggle room if the economy, jobs or inflation change significantly but, for sure, we are at the beginning of a rising tide of interest rates. Rising interest rates, aside from negatively affecting bond prices, create real resistance for the stock market. At some point bond yields become competitive with risk adjusted stock returns, and earnings quality is reduced as sales increases may reflect price inflation as much as unit sales increases. As well, it costs more money for businesses to finance new initiatives, possibly slowing expansion. Does this mean it’s time to exit the stock market, or does it mean it’s time to be more quality and price selective? Because the Fed has reiterated it’s intention to be very gradual and data driven in the process we believe it won’t be necessary to turn our backs on stocks, but it is time to double down on our homework. Even within our favored industries for 2016, tech, biotech […]
More mature companies in more stable industries tend to pay dividends. Some might think that a younger investor would benefit more by owning smaller, more rapidly growing companies. And, yes, younger investors should have some of their investment funds in rapidly growing companies, although they are often riskier (think early stage biotech or social media.) Aside from the well known benefits of owning dividend stocks; less volatility, total return from income and growth, and cash flow in times of market weakness, there is an important advantage for younger investors. Many companies have a history of raising their dividend annually and many others raise their dividend almost every year. (Most industries go through cyclical downturns causing the suspension of the dividend hike for that period.) The dividend yield on most of our best dividend paying stocks at their current prices generally ranges between 2-3%. If dividends rise on average only 3% per year the dividend will double in 24 years, becoming a 4-6% dividend yield on today’s prices. (A 4% per year increase doubles in 18 years.) If dividends are reinvested over the years the compounding effect is even greater. As we get closer to retirement we want to be sure […]
One of the most common questions I get from clients is, “If I have a little extra to save each month, should I use it to accelerate my mortgage payments or invest in the market?” First, I respond to the question with a question, “What is the rate of return you earn by paying down your mortgage…?” Answer – It’s your mortgage’s interest rate less any savings generated in the form of itemized tax deductions. I like examples so I’ll show one here: You have a $450,000 mortgage with a 4.50% fixed 30 year loan. You and your spouse have a combined top federal tax rate of 25%. Your rate of return paying down this debt is as follows: 4.50% X (1 – .25) = 3.38% The next step is to evaluate your alternative… investing in the market. To keep it simple, the S&P 500 index has averaged a total annual return of ~7.6% in the last 10 years, a range including 2008, the second worst stock market year in U.S. history. Let’s assume that’s an after tax return of 6.5% (dating back to the 1970s, returns have actually been significantly better than this). So why would anyone take a […]