Here's To Your Wealth
The U.S. investment market's mid-year report card is a mixed picture. Bonds continue to do well while stocks continue to be flat to down year to date.
All those who said interest rates couldn't go any lower and avoided the bond market, continue to miss a nice rally. Of course, the high yield bond correction in late 2015 put a temporary wrench into things, but as soon as oil rebounded earlier this year so did high yield bond prices. These past few years, there was constant worry that interest rates would rise. We have consistently written that for a variety of reasons we disagreed with this assessment. And now, with Britain leaving the European Union, the U.S. Federal Reserve has another reason to not raise rates - or at least not raise rates until after our election.
Who can say for sure that this bond market rally, which has been fueled by lower interest rates is over? The U.S. ten year Treasury may be hovering around all-time lows of about 1.50% but it can still go lower. Disagree? Have you seen what is happening with German interest rates? Germany's ten year note is paying below zero percent! So when you hear "rates have to go lower" ask the person what is their reason for that pontification. And while those sitting on cash wait to be right, they continue to miss one of the best U.S. bond market rallies in recent history. To be sure, the bond rally will end, but for now, we don't see a catalyst for a jump in U.S. interest rates.
These lower rates are creating a major planning conundrum: How do near retirees and retirees invest in lower risk assets (like U.S. Treasury bonds and investment grade corporate bonds) if the yield on those investments is so low? The cost of the Federal Reserve low interest rate policy may have unintended consequences for investors who instead are chasing higher returns in higher risk assets classes. These investors may be attracted to "Income Funds" but many of these funds invest overseas, in high yield bonds, dividend paying U.S. stocks and other risky assets. For a moderate or high risk investor willing to experience wide fluctuation in account value these funds may be a good fit. But for retirees who previously were invested in bank CD's they may someday get a rude awakening.
Some disappointment has already been felt by investors in the U.S. stock market and more noticeably by investors in overseas stocks. We have been underweight overseas stocks for a few years now. Prior to the Brexit (Britain voting to exit the European Union) we were poised to gradually invest more into developed overseas markets like Europe. But for now, that is on hold as we see uncertainty in the Eurozone and our focus will continue to be more on domestic stocks. Even though the U.S. has been outperforming most overseas markets, for the past 18 months, most major U.S. stock market indexes are flat to down, and year-to-date, some indices like the NASDAQ and the Russell 2000 (small cap) are down about 10 percent or more. It seems that the risk to the U.S. stock market is that the stronger U.S. dollar would negatively impact the earnings of large, U.S. multi-nationals whose exports would now be more expensive. This, on a relative basis, would help smaller companies who derive most of their revenue domestically. But this has not been the case and small caps continue to underperform.
Perhaps U.S. large cap stock are benefitting from a flight to dividend income brought about by (former) bank CD and bond investors seeking yield wherever they can. In this environment, that might mean large cap, dividend paying stocks that can generate yields greater than the aforementioned German and U.S. government debt. Retirees who need income usually cannot afford to see wide swings in their portfolios. But these days, if they want yield, they need to climb the risk ladder.
Times like these remind me of what a wise fund manager at Sun Trust unequivocally told me: "there is no such thing as a safe stock". And these days, with headlines blaring and the world in turmoil, investors should know the risks they are taking.
Please call us with any questions you have on your personal situation.
"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful"- Warren Buffett
Mark Avallone and the Potomac Wealth Advisors Team
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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.
Diversification and asset allocation do not guarantee against loss. They are methods used to manage risk.
The indexes are constructed and weighted using market value-weighted index. They provide 95 percent market capitalization coverage of developed markets and emerging markets. More than 3000 DJGI indexes provide data on more than 5500 companies around the world. Market capitalization is float-adjusted
*The DJIA is a widely followed measurement of the stock market. The average is comprised of 30 stocks that represent leading companies in major industries.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
*The NASDAQ Composite Index is a market-valued weighted index, which measures all securities listed on the NASDAQ stock market.
*The S&P Mid Cap 400 Index This Standard & Poor's index serves as a barometer for the U.S. mid-cap equities sector and is the most widely followed mid-cap index in existence. To be included in the index, a stock must have a total market capitalization that ranges from roughly $750 million to $3 billion dollars. Stocks in this index represent household names from all major industries including energy, technology, healthcare, financial and manufacturing.
Russell 2000 Index
is a small-cap
stock market index
of the bottom 2,000 stocks in the
Index is a
stock market index
that is designed to measure the equity market performance of
outside of the U.S. & Canada. It is maintained by
a provider of investment decision support tools; the EAFE acronym stands for
Europe, Australasia and Far East.
* The MSCI
Emerging Markets Indexs a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
*The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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