Market movement since late January has been a lot like a toy boat in a pond- bouncing around without any direction or purpose. As of May 1st, The Dow Jones Industrial Average is lower by a mere 3.4% for the year, the S&P 500 is down 1.6% YTD but the technology heavy Nasdaq is actually up 2%. Growth stocks lead value stocks in all market capitalizations (sizes) which illustrates investors are more interested in earnings growth than dividends and stability. Some of the underperforming sectors of recent years have actually rotated into favor once again and are delivering positive returns. Take energy and commodities for example- both of those sectors show negative 1, 3 and 5 yr. total returns; however, they are among leading sectors so far this year.
Even with corporations continuing to deliver outstanding earnings reports, markets can’t find any traction. In past quarters these types of earnings reports sent the overall market charging higher. What’s wrong this time? We believe that the main focus has shifted to interest rates and the fear that a roaring economy will lead to inflation which will require the Federal Reserve to hike interest rates quickly. Inflation shouldn’t come as a surprise to our clients or readers of our reports. We at PWS have been talking about it for several years and have taken steps within our model portfolios to combat rising inflation. Importantly we have added anywhere from 5-10% exposure to commodities in our models and also reduced fixed income holdings both in total exposure and in bond duration.
With the recent headlines surrounding tariffs, trade-wars, and white-house press briefings, it’s easy to get distracted from the strategy we have in place. Our strategy is and always will be to invest client assets for long term profitability by allocating to proven fund managers and high quality companies in a well thought out, diversified and customized portfolio. This week we made changes to several of our models in that we sold an exchange traded fund (VTV) and a large cap value mutual fund (Investment Co. of America) which both invest in large cap value companies based in the US, and purchased foreign ETFs and funds which invest in developed international equities. Valuations are more attractive in overseas markets compared to large cap companies here in the US.
So while we don’t expect a full blown recession, we do expect volatility to remain prevalent, especially anytime fears of inflation or higher interest rates dominate the headlines. Why may higher rates be bad? Well, higher rates means more interest expense to businesses and thus, potentially less profits to shareholders. It can also mean lower spending by consumers. Fewer people want to borrow for cars, boats or homes if the monthly payment creeps up. This leads once again to lower profits in almost all sectors as supply chain orders dry up. Interest rates are headed higher and markets know this. The unease is simply a question of ‘how fast and how far will they go?’ Living and working in a great economy has many benefits. Investing in one can be challenging in the short term as markets strain to understand what to expect. Our economic outlook remains positive and we have positioned client portfolios for both higher rates as well as demand growth in energy, banking, technology and materials.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. ETF shareholders should be aware that the general level of stock or bond prices may decline, thus affecting the value of an exchange-traded fund. Although exchange-traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the funds may not be able to exactly replicate the performance of the indexes because of fund expenses and other factors. Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds. The prospectus contains this and other information about mutual funds. The prospectus is available from our office [or from the fund company] and should be read carefully. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Billy Peterson and not necessarily those of Raymond James. Investing involves risk and investors may incur a profit or a loss.