By Tim Mitrovich
President and CEO of Ten Capital Investments
As of March 17, 2015
U.S. Markets and the Fed It’s been a very interesting start to the year in the global markets, with continued divergences between different asset classes. For example, as of market close on March 16, the U.S. bond index was up 0.73% while the Global bond index was down -3.18% for the year. While in the equity markets, the S&P 500 index is up less than 1% for the year as of this writing, compared to the International equity index (EAFE) which is up over 3% this year.
Most of the volatility to date has been caused from the market trying to anticipate when the Federal Reserve will finally begin to raise the Fed funds rate. Specifically, the markets are watching closely whether the Fed will remove the word “patient” from its statement on March 18th.
The fixation on one word is more than a little ridiculous, but that is what is driving the U.S. market inthe short-term. Investors should note that the most recent examples of the Fed beginning to lift rates while creating short term market turbulence has actually coincided with improving stock markets.
Respected economist Brian Wesbury from First Trust had the following to say in his note this week titled Resist the Rate-Hike Huff, “And just as last year’s data slowdown in Q1 didn’t stop the Fed from tapering, this year’s volatility and weak data won’t stop the Fed from raising rates by mid-year. The best news is that equities rebounded in 2014, despite continued tapering. We expect the same this year as the Fed launches its first rate-hikecycle since 2004. And weakness now is a head-fake caused by a hike-huff.” We would concur with his sentiment, that volatility based solely off rate-hikes is probably an opportunity.
While volatility around rate-hikes is likely at some point, the recent sell-off in energy, current low levels of personal debt and strengthening dollar are setting up to be significant catalysts for personal consumption growth domestically.
"And just as last year’s data slowdown in Q1 didn’t stop the Fed from tapering, this year’s volatility and weak data won’t stop the Fed from raising rates by mid-year."
*UPDATE: The Federal Reserve did remove the word "patience" from its statement, but Fed Chair Janet Yellen stated that this move is not meant to signal that they will, or will not, be raising interest rates in June. She also stated they would like to see their 2% inflation target reached. These statements were interpreted as "dovish" and markets rallied across asset classes.
A Shift In Market Sentiment After a five year run of U.S. equity markets leading the charge, it does appear that global markets may be poised to have a solid run ahead of them. Last week I had a call with Stephen Peak of Henderson Global Investors in which he stated he strongly believes that international equity markets will likely outperform the U.S. equity markets over the next few years and that the U.S. dollar’s run up should begin to slow. Notably, the only reason many international markets posted negative returns last year was due to the strengthening of the U.S. dollar (see chart below).
He, like most managers we work with, does not believe it pays in the long run to try to hedge currencies, but rather that type of scenario needs to just be expected from time to time. Coupled with improving corporate earnings in Europe and extremely low expectations, globally diversified investors may have a good year ahead of them.
In other news, Citi lifted its approximate 18-month target for European stocks from up 37.5% to up 70% based on their conviction in European stock values. “European equities offer investors a historic yield pick-up over both corporate and government bonds,” said
Citigroup, noting that stocks there haven't been this cheap compared to credit in more than 50 years. We certainly aren’t recommending a huge allocation shift, but rather highlight these recent swings in market performance and sentiment as yet another example of how global diversification and patience are superior to attempting to time-markets.
We have been encouraging both existing and potential clients to explore our new High Income series of portfolio strategies. We spent the better part of last year meeting with new managers, discovering some unique strategies and then using new software to fine-tune the composition for each strategy’s particular risk profile. Our conviction and belief in some of their unique features is very high, and we are very pleased with the response from clients, both longstanding and new, as well as how they have responded to the market fluctuations so far. Reach out anytime to learn more about them, as well as some other potential solutions from our array of industry partners.
NOTE: This report does not constitute an offer to sell, or a solicitation of an offer to buy any security. This report is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable.
TEN CAPITAL INVESTOR NEWSLETTER MARCH / APRIL 2015