2015 Another interesting year in the global economySubmitted by Antaeus Wealth Advisors on May 12th, 2015
- City with highest average 401(k) saving rate in 2014: San Francisco, 14.8%. National average: 8.1%. Average 401(k) contribution in 2014: $9,630. (Fidelity, Natixis Global Asset Management)
- Average home price in San Francisco: $859,000. Los Angeles: $433,000. Atlanta: $190,000. Detroit: $116,000. (Local Market Monitor, April 2015)
- Employee’s share of medical expenses, defined as premiums plus deductibles, in 2013: 10%. In 2003: 5.3%. (Commonwealth Fund)
- Amount air travel has grown in emerging economies since 2007: 55%. (Airbus, April 2015)
- Percentage of those over age 65 who will need long-term care services and support at some point: 75%. (Centers for Medicare and Medicaid Services, 2015)
- Maximum 2015 Adjusted Gross Income (AGI) for a single tax filer to receive a Federal Saver’s Credit for contributing to a retirement plan: $30,500. Maximum AGI to receive the credit for married filing joint filers: $61,000. (Internal Revenue Service)
- Percentage of retail investors who want fossil-free investing options: 67%. (Sustainable, Responsible Impact Investing, April 2015)
- Number of Japanese Yen 1 U.S. Dollar purchased as of 05/07/15: 119.75. As of 01/01/13: 86.70. Number of Eurozone Euros 1 U.S. Dollar purchased as of 05/07/15: 0.89. As of 01/01/13: 0.76.
- Average intra-year drops in the S&P 500 Index since 1980: 14.2%. Percentage of years the S&P 500 has provided a positive total return since 1980: 77%. (J.P. Morgan Asset Management)
- Hedge Funds. 5 year average annual return of credit arbitrage strategies as of 02/28/15: 6.8%. Event-driven: 6.0%. Merger arbitrage: 3.2%. Equity market neutral: 2.7%. (Tower Watson, HFR, Cambridge Associates, Burgiss)
- 5 year average annual return of private equity as of 09/30/14: 16.8%. Venture capital: 14.9%. (Tower Watson, HFR, Cambridge Associates, Burgiss)
“There is no asset so good that it can’t be a bad investment bought at too high a price.”
With global Gross Domestic Product (GDP) growth currently below 3%, low overall inflation, and volatile currencies, 2015 is proving to be another interesting year in the global economy and capital markets. Last month American authorities settled that a “significant” cause of the sudden 10% plunge in U.S. stock market in 2011 – a.k.a. the flash crash – was the manipulation of futures contracts by a lone 36 year old British day trader. How a single trader was able to cause such market convulsions, and how it took authorities four years to figure it out, is, well, shocking. That said, the major themes thus far in 2015 are low oil prices (West Texas Crude fell from $101.06 per barrel on 05/07/14 to $58.94 on 05/07/15), a strong U.S. Dollar, rising real estate prices, improved U.S. economic growth, falling U.S. unemployment, and low interest rates throughout the developed world.
The current U.S. bull market is the 3rd longest since 1900. Correlations among stocks diverged in the first quarter, providing a ripe environment for stock pickers, with the average diversified equity mutual fund returning 2.48% compared to just 0.8% for the average S&P 500 index fund, according to Lipper. As of May 11th, 2015, year to date the total return (price appreciation + dividends) of various indices has been led by international stocks: MSCI Europe Australasia and Far East Index +9.9%; MSCI Emerging Markets +8.9%; and S&P 500 Index +3.4%. Silver’s price has risen +2.1%, while Gold has slipped (1.6%); and investment-grade bonds, as represented by the Barclays Capital Aggregate Index (price appreciation + interest), have returned just +0.8%.
While Antaeus does not expect a Federal Reserve (Fed) interest rate hike until at least the third quarter, we do expect a move before year end. Rising interest rates combined with the strong U.S. Dollar represent headwinds for most U.S. companies, and hence for U.S. stocks overall. Further, with U.S. stock valuations fairly rich (the S&P 500’s Price/Earnings, Price/Book and Price/Cash Flow ratios all are higher than their 25 year averages), we expect that the next 200 points up on the S&P 500 will come with materially more volatility than the last 2,000.
Though speculation has entered certain markets – such as in metropolitan Los Angeles – Antaeus’ opinion is that the overall rebound in residential real estate prices has another year or two before running out of steam. Also note that arguably the bubble mentality already has emerged in the world of start-ups and venture capital – fueled by low interest rates.
As for oil, with swelling inventories – partly caused by the success of shale technology – oil prices may fall farther, bringing additional further pain to companies in the energy sector, while padding consumers’ wallets and helping large consumers of oil, such as the airlines. While a global need for efficiency and environmentalism also exists, we expect that eventually the supply-demand imbalance will change, and oil prices will stabilize in the $65/barrel to $75/barrel range.
The nuclear agreement reached between Iran and the five permanent members of the United Nations, plus Germany, may mitigate the ring of fire raging in the Middle East and Arabian Peninsula, at least in the short-term. In China the question is not whether growth will slow – it will – but whether it will be gradual with some bumps along the way, or a sudden, dangerous lurch. China’s government continues to use various measures to boost its economy, which has driven Chinese stocks higher.
Japan and the Euro-zone
As of 03/31/15, both Japan’s GDP and the Euro-zone’s GDP had grown by just 0.3% annually since equities started to rally in these regions in early 2012. Despite languishing economies, as a result of Quantitative Easing (QE) by the Bank of Japan (BOJ) and European Central Bank (ECB), depreciating currencies and falling oil prices, stocks in Europe and Japan have been on a tear. The BOJ now purchases 80 Trillion Yen of securities per year and the ECB around 60 billion Euros per month. With all of this central bank activity, more than $5 trillion of debt securities around the world have negative yields according to a Bank of America Merrill Lynch.
Japanese companies have demonstrated improved capital and operating efficiencies, which may lead to better earnings. Though offsetting the negative economic impact of an elderly, shrinking population is difficult; more women have entered the work force in Japan, thus helping its economy. In the short-term, with QE firmly in place, it seems likely that the Euro, Pound and Yen will continue to slide against the U.S. Dollar, providing revenue opportunities for exporters in those countries.
While keeping Greece in the euro is important – though not at any cost – the Athens government is teetering on bankruptcy with Debt to GDP above 175%. Devaluation traditionally has been the treatment for such economic pain, but remaining in a common currency removes this option. France, Spain and Italy also continue to battle high unemployment: Europe’s long-term picture remains a murky one.
One risk going forward is the lack of an economic rebound in Europe and Japan. Conventional wisdom is that low interest rates stimulate an economy as reduced borrowing costs make it easier to buy houses and for companies to invest and expand; and lower yields on savings cut incentives for consumers to stash their cash in banks, instead making them more inclined to spend. Despite negative rates in Japan and Germany and below zero mortgage rates for some borrowers in Spain – aging populations there have increased saving and reduced consumption. Some wealthy investors in Europe are very concerned about the Euro and have been snapping up Swiss Francs, silver and gold – much like many Americans did a few years ago.
Second, Antaeus believes the most likely cause of a potential correction in the prices of U.S. stocks is a “forcing event” – where the Left and Right must make a deal in the House of Representatives – such as raising the debt ceiling this summer. While we would view a fall in stocks caused by Congressional bickering as a buying opportunity, we also believe that U.S. small-cap stock valuations are stretched, as are prices of publicly traded REITs and high yield bonds. We are particularly concerned about the latter because new rules on capital intended to prevent a repeat of 2008 has dried out the liquidity in bond markets during a period of record issuance of debt. Investment funds now hold 20 times as many bonds as banks, and the lack of bank buyers means that investment vehicles containing bonds – such as mutual funds – promise greater liquidity than is afforded by their underlying assets. Investors in high-yield bond funds beware: asset managers could be forced to offload securities at fire-sale prices in a time of turmoil.
Third, material risks exist in certain Emerging Markets (EM) in the short-term. As global markets seek new supply-demand balances in oil and commodities, Antaeus suggests an over-weight to stocks in EM countries that are net commodity consumers (e.g. India) vs. net commodity producers (e.g. Russia), while avoiding investments in countries with high levels of debt denominated in U.S. Dollars (e.g. Brazil). India, however, is promising long-term due to the “Modi Wave:” attacking bureaucracy, uprooting corruption, modernizing infrastructure, and promoting entrepreneurship.
Innovators are creatively destroying companies tied to leveraged, older technologies, and recent advances in biotechnology are extraordinary. As we move to the latter stages of this bull market, consumer staples seem appropriate for defense, whereas the energy sector appears oversold and poised to rebound. Though small-cap stocks are expensive, some are compelling, especially considering they tend to be less dependent on exports during a period of a strong U.S. Dollar compared to their blue chip cousins. Antaeus also anticipates some corporate tax reform this yes, which will bring opportunities to certain sectors, such as retail.
It’s a great time for Americans to travel to Europe, Asia and other places with currencies exhibiting weakness relative to the U.S Dollar. Enjoy the beginning of your summer!
Evan P. Welch, CFP®, AIF®
Chief Investment Officer
Antaeus Wealth Advisors, LLC
May 11, 2015
Disclosure: Indices mentioned are unmanaged and it is not possible to invest directly in an index. No single strategy can assure profit or guarantee against loss. Past performance does not indicate future returns. The opinions expressed in this commentary are solely those of Antaeus Wealth Advisors, LLC and are based on information believed to be reliable; however, these views may change as information changes or becomes out of date. c 2015.
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