After getting off to a strong start in 2012, the stock market gave back nearly all of its returns in May. Fears over Europe’s financial crisis and slowing global growth, led many investors to take profits and either move to the sidelines or re-invest in US Treasuries. The market movements look very similar to 2011, when fears of a double-dip recession rattled investors in early summer.
Corporate earnings in the US have remained fairly strong, especially in the manufacturing sector. US stocks remain at attractive valuations compared to historical levels, but aren’t likely to experience significantly expanding P/E ratios in this slow global growth environment. Bonds remain relatively unattractive at current levels (10 year Treasury near 1.6%). Interest rates are likely to remain near historically low levels for the next couple of years as developed markets continue to deleverage and investors continue to buy US Treasuries for safety. If economists are right, and we do see 2-2.5% domestic GDP growth over the next 12 months, US stocks should still be the favored asset class due to their strong cash flows and balance sheets and reasonable valuations.
We are likely to get heavy doses of volatility until Europe works through its financial and political issues, until after the US presidential election and budget cuts, and until China’s growth stabilizes. Therefore, it is important that investors have their portfolios in line with their overall risk tolerance and maintain plenty of liquidity for living expenses in the form of cash and short term bonds.
June 20, 2012
December 8, 2011
EU Debt Crisis Update
Last week, the US Federal Reserve, ECB, and monetary authorities of several other leading nations, came together to cut costs of emergency funding to EU banks, in a coordinated effort to help alleviate bank funding concerns and improve market functionality. While this action did not solve fiscal problems, it brought some much needed stability to the EU markets at a crucial time. Global stock indices rallied sharply on the news, ending an 11-day slide.
All eyes will continue to focus on European leaders, as they discuss plans to form a closer fiscal union during their Dec 8-9 financial summit. Global stocks will likely react heavily to perceived progress, or lack-there-of, following the summit. The debt crisis has had a profound dampening effect on economic growth in Europe, and its nations will have a long road to full fiscal recovery.
News in the US has been much more positive. Retail sales, existing home sales, and several other key economic reports issued in the last week, showed improvement in the US economy. We continue to advise investors to focus on quality assets with strong fundamentals. A well-constructed portfolio of high quality assets will serve investors well as they ride out continuing market volatility.
All eyes will continue to focus on European leaders, as they discuss plans to form a closer fiscal union during their Dec 8-9 financial summit. Global stocks will likely react heavily to perceived progress, or lack-there-of, following the summit. The debt crisis has had a profound dampening effect on economic growth in Europe, and its nations will have a long road to full fiscal recovery.
News in the US has been much more positive. Retail sales, existing home sales, and several other key economic reports issued in the last week, showed improvement in the US economy. We continue to advise investors to focus on quality assets with strong fundamentals. A well-constructed portfolio of high quality assets will serve investors well as they ride out continuing market volatility.
June 23, 2011
Frustrated by Low Interest Rates?
The Bond Market has been rallying since February on concerns about a potential Greek default and slowing global economic growth. While this has been good for bond returns, it has been very painful for investors who need cash flow. Bond investors have seen their investment income from bonds shrink over the last decade, and were hoping that a solid economic recovery would provide some much needed relief, in the form of higher interest rates.
Many investors are tempted to reach for higher interest-rate products, as articles and investment professionals have touted ideas, such as “fixed income alternatives.” These alternatives generally have significantly higher risk characteristics than most fixed income investors are willing to take, and can lead to large portfolio losses in the future.
In these frustrating times for fixed income investing, there are several things we are doing, to somewhat mitigate the effects of low interest rates. First and foremost, we are maintaining disciplined laddered bond portfolios. We know that periods of rising interest rates are in our future, but we don’t know when. By investing in maturities ranging from 1-7 years, we take advantage of a steep yield curve, but don’t take undue risk of investing in long maturity bonds. Long bond portfolios will be damaged the most by rising interest rates.
Another strategy that we recommend for fixed income clients, depending on their risk tolerance, is investing a small portion of their portfolio in income oriented stocks. There are select blue chip stocks, paying dividends of 3-4%, which give our clients higher income than short term bonds and the opportunity for growth. Many of these stocks have a history of raising their dividends annually, which amounts to a pay-raise for our clients. This strategy helps offset inflation when we begin to see it on a regular basis. With the 5 year Treasury yield around 1.5%, it also gives clients a much needed boost to their income.
With economic growth slumping a bit, the forecast is calling for lower interest rates to continue through 2011 and possibly through 2012. While that forecast is very frustrating, there are reasonable strategies that fixed income investors can employ to boost their incomes, without taking significant risk.
Many investors are tempted to reach for higher interest-rate products, as articles and investment professionals have touted ideas, such as “fixed income alternatives.” These alternatives generally have significantly higher risk characteristics than most fixed income investors are willing to take, and can lead to large portfolio losses in the future.
In these frustrating times for fixed income investing, there are several things we are doing, to somewhat mitigate the effects of low interest rates. First and foremost, we are maintaining disciplined laddered bond portfolios. We know that periods of rising interest rates are in our future, but we don’t know when. By investing in maturities ranging from 1-7 years, we take advantage of a steep yield curve, but don’t take undue risk of investing in long maturity bonds. Long bond portfolios will be damaged the most by rising interest rates.
Another strategy that we recommend for fixed income clients, depending on their risk tolerance, is investing a small portion of their portfolio in income oriented stocks. There are select blue chip stocks, paying dividends of 3-4%, which give our clients higher income than short term bonds and the opportunity for growth. Many of these stocks have a history of raising their dividends annually, which amounts to a pay-raise for our clients. This strategy helps offset inflation when we begin to see it on a regular basis. With the 5 year Treasury yield around 1.5%, it also gives clients a much needed boost to their income.
With economic growth slumping a bit, the forecast is calling for lower interest rates to continue through 2011 and possibly through 2012. While that forecast is very frustrating, there are reasonable strategies that fixed income investors can employ to boost their incomes, without taking significant risk.
June 3, 2011
Summer Stock Sell-off
Several factors have contributed to the sell-off that has seen the Dow Jones Industrial Average shed over 600 points, or nearly 5%, since reaching its 52-week high in early May. US manufacturing and employment growth has been weaker than expected lately. Emerging markets nations, such as China and India, have intentionally slowed their economies to combat rising inflation. Coupling fears of slowing global economic growth, with renewed concerns of a default on Greek sovereign debt, has compelled investors to sell higher risk stocks, and seek the safe haven of bonds once again.
US Corporations have continued to produce strong sales and earnings, but this has not been enough lately, to overcome fears of slowing economic growth. The steep yield curve is certainly not implying that we are headed for a recession at this time, but rather, a slow patch due to the aforementioned headwinds. With conservative estimates of Global economic growth still ranging in the 3-4% range, we are not expecting more than a bull market correction. As such, we will be looking to add to our positions of quality growth stocks throughout this weakness in the markets, as long as our thesis on global growth appears intact.
US Corporations have continued to produce strong sales and earnings, but this has not been enough lately, to overcome fears of slowing economic growth. The steep yield curve is certainly not implying that we are headed for a recession at this time, but rather, a slow patch due to the aforementioned headwinds. With conservative estimates of Global economic growth still ranging in the 3-4% range, we are not expecting more than a bull market correction. As such, we will be looking to add to our positions of quality growth stocks throughout this weakness in the markets, as long as our thesis on global growth appears intact.
February 23, 2011
Effects of Middle East Unrest on US Markets
The stock markets have been very volatile over the last week as participants pay close attention to the unrest in the Middle East. Even though this trend may continue for a while, this gives us the opportunity to add to some of our favorite positions at discounted prices. When the markets are ready to focus on underlying fundamentals again, our stocks will be in a good position to perform.
Consumers have felt the pinch lately too. The unrest has led to rising commodities prices, and more specifically, higher gas prices at the pumps. This is certainly not helping weary consumers that have been struggling following the worst recession in 50 years.
Consumers have felt the pinch lately too. The unrest has led to rising commodities prices, and more specifically, higher gas prices at the pumps. This is certainly not helping weary consumers that have been struggling following the worst recession in 50 years.
February 16, 2011
Bond Yields
Many investors are confused by the different ways bond yields are quoted...coupon rate, current yield, yield to maturity (YTM), etc. Check out this link for an easy explanation.
Harbour Trust
Founded in 1997, Harbour Trust & Investment Management Company creates investment plans designed to meet our clients' specific financial goals.
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