Markets Rally But Headwinds ContinueSubmitted by Antaeus Wealth Advisors on September 5th, 2012
- Average American’s annual savings rate, May 2012: 3.7% (Journal of Financial Planning).
- As of 06/30/12, the average American’s single-family home value has dropped 17% from its peak value on 06/30/07 (Office of Federal Housing Enterprise Oversight).
- Based on 2011 sales, 7 of the 10 largest corporations in the world are in the oil industry (Fortune).
- Excluding dividends, since bottoming on 03/09/09, the S&P 500 had gained 109% through 08/24/12 (BTN Research).
- In the 1930s, the average length of a home mortgage taken out by an American homebuyer was 5-10 years (Penn Institute of Urban Research).
While growth concerns in China and unemployment here in the United States have created headwinds for investors, clearly the European debt crisis remains the most important economic story. Though markets recently rallied on news of a new bond buying program by the European Central Bank, the bottom line, in my opinion, is that at some point Europe’s challenges will spark a drop in the prices of global stocks. Such a drop would provide opportunity to those willing to purchase equities at that point, yet also a turbulent ride for those with a large percentage of their portfolio in stocks. For the moment, breaking up the Euro would be more expensive than trying to hold it together. But if Europe keeps on arguing, and the politics there become more rancid, this calculation may change.
With the tail risk inherent in sorting out Europe’s debt, Antaeus believes that holding a portion of your portfolio in assets that tend to mitigate volatility during times of stress in the stock market – such as cash, mortgage backed securities, managed futures and even gold – is prudent. That said, many U.S. companies exhibit strong fundamentals and excellent free cash flow, and equities are under-owned. For example, between 01/01/07 and 06/30/12, investors redeemed $513 billion from domestic stock mutual funds while adding $909 billion to taxable bond mutual funds.1 Although we do not expect price-earnings ratios to expand materially during an environment of negative real interest rates, with technology stocks trading at 12 times earnings and energy stocks trading at 10 times earnings, today the stocks of many high quality companies are cheap. Similarly, the spread between the earnings yield of the S&P 500 and the 10-year Treasury yield has not been this high since the mid-1970s.
Investing via a rearview mirror is a dangerous strategy. While bonds have produced impressive returns over the past few decades, this party soon may come to an end. For the long-term investor, buying Treasuries today is like buying Japanese equities in 1988, technology stocks in 2000 or real estate in 2005. Post credit collapse fear is so great that an investor who purchases a 10-year Treasury Inflation Protected Security today will lock in a loss of 4.5% over the next ten years before taxes and inflation. In the latest quarter, the 10-year Treasury touched a 140 year low of 1.45%.2
While Antaeus is avoiding Treasuries, we do recommend treading carefully when reaching for yield by purchasing low quality bonds. As the saying goes, when you are in a desert, you tend to drink things you don’t want to drink. For clients where it is appropriate, however, we have been adding emerging market bonds to their portfolios, while cognizant that such bonds could be impacted by heightened risk aversion among investors. Defaults continue to decline in this asset class, yields are compelling, and emerging countries have significantly less leverage than that of developed countries.
Commodities – including oil, gas, copper and aluminum – are attractive today because their prices have been pushed down by global macroeconomic uncertainty and financial deleveraging. In terms of stocks, Antaeus likes multi-national companies that both have access to the growing middle class in emerging markets, and are based in countries with stable rule of law, such as the United States. Barring a sudden acceleration of global inflation (a good time to own gold) or deflation (cash is king), our focus continues to be finding investments for our clients that we expect to provide long-term, growing free cash flow.
Antaeus anticipates that many of the themes noted in prior commentaries: high correlations among asset classes, market volatility, high unemployment, low interest rates, and slow growth – will continue for quite some time as the world goes through the process of de-leveraging. Here in the United States, we hope that Congress will move forward with fiscal and debt reform to satisfy the bond markets and rating agencies, and to get our country on a real path to sustainable debt levels. This process will be painful for many Americans; but the alternative – insolvency – is worse.
We recently posted Antaeus’ investment process on our website, and I encourage you to read it. According to a recent study, the average investor earned an average annual return of just 2.6% on their portfolio over the past three decades, despite significantly higher returns in the major stock and bond indices.3 We are here to prevent you from being a part of this statistic.
Evan P. Welch, CFP®, AIF®
Chief Investment Officer
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 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.
The opinions expressed in this article are those of Antaeus Wealth Advisors, LLC. Securities offered through Cambridge Investment Research, Inc., a Broker-Dealer, and member FINRA/SIPC. Investment advisory services and financial planning offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Antaeus and Cambridge are not affiliated companies.
1 Source: J.P. Morgan Asset Management
2 Source: The Wall Street Journal
3 Source: Journal of Financial Planning