The current investment market climate reminds me of a scene from the old TV sitcom F-Troop. U.S. soldiers ask their Native American friends, the Hekawi tribe, how they got their name. As Chief Wild Eagle, the Hekawi leader, said back then (paraphasing: ”many moons ago, Tribe travel west, then come big day… tribe fall over cliff, that when Hekawi get name. Medicine man say “I think we lost. Where the heck are we?”
And so, with that as our inspiration, we start the Sungarden Blog with a quick review of what the world markets are doing, and how they may impact today’s investor. In other words, “Where the Heck Are We?” Here are the key points for any investor right now:
- Thanks to something called “ZIRP” (Zero Interest Rate Policy), the U.S. Federal Reserve has been buying most of the Treasury Bonds issued by the U.S. Government to keep demand for them up, and keep interest rates low. FYI, the Fed allegedly acts independently of the Government. Geez, wouldn’t any business owner like to have someone who agrees to buy all of the product they produce, if no one else will buy it? This activity is not sustainable, and now many other world governments are taking a similar path. This has worked for a while, but it makes so-called “high-quality bonds” (Treasuries and higher-rated Corporates and Munis) expensive at the least, and downright dangerous at worst. This has led to investor behavior repeating itself in a way that is very concerning, and reminiscent of past “bubbles.” Whether its hoarding low yielding bond funds, reaching for yield in all the wrong places (Eddie Rabbit parody for those of you who remember), and now forgetting that the stock market also goes down. Don’t get us wrong - we see many good signs for the markets and investors. But there will be some hurdles along the way, particularly once the ZIRP is discontinued and the economy here is forced to breathe on its own.
- Stock markets outside the U.S. are lagging our market noticeably. Emerging Markets are having a particularly rough time in relative terms. While Emerging Market economies are growing at much faster rates than the developed world, their growth rates are slowing a bit as they mature. This Emerging Market “slowing” is no match for a pumped up ZIRP here at home. Why get real growth when you can create it artificially? Ask a skier if they prefer real snow or machine-generated snow. You know the answer. The media and market gurus are oversimplifying things, particularly when it comes to whether the market is over- or under-valued. Guest after guest lauds the cheapness of the stock market, given its Price-Earnings ratio of 13 or 14. Our friends at the Leuthold Group inform us that if you take a more meaningful view of earnings (using “normalized” earnings over the past several years, not simply the past year’s earnings), the S&P 500 Index’s P/E Ratio is over 20, a historically high level This is confirmed by our own stock research here at Sungarden. It’s easy to find good companies to own, but its very difficult to find them at reasonable prices.
The takeaway for now: our volatility-management approach to investing is a particularly good guide to keep portfolios in a healthy balance of reward potential to risk of large loss. We are positioned around our long-term target levels of volatility for each of our three core strategies, but with an eye toward gradually reducing those levels. It is a great time to be an investor, but if you don’t manage volatility along they way, things won’t seem so great most of the time.
Thanks for reading! We’ll write to you again soon.
© Sungarden Investment Research