Making money in stocks will be trickier in 2015. With stocks now up three fold since the 2009 bottom, and on the cusp of finishing another double digit return year, the low hanging fruit is picked.
Valuations are now richer than the ten year average, and the market’s dividend yield has dipped below 2%. Investors are bracing for rate hikes from the Federal Reserve, as a near six year period of rates set close to zero seems to be coming to an end.
The US Dollar has soared to a five year high, making our exports and business activities abroad, which constitute nearly 50% of the revenues of the S&P 500 companies, less profitable when translated back into our currency.
Overseas economies are struggling to stay out of recession, as weak demand threatens deflation. In Japan, more aggressive monetary assistance seems to do little, while in Europe the desire for a greater financial stimulus is fanning the flames of nationalism and may threaten the very existences of the monetary union.
Yet, despite all the concerns, interest rates remain low; the conundrum of how to improve on the paltry yield of just 2.3% on the US Treasury or 0.65% or even 0.42% on the ten years of Germany and Japan remains. Corporate earnings keep chugging along and employment indicators keep improving.
Japan’s been mired in an over 20 year slump. It’s determined to move past that. Monetary policy is actually more aggressive than the US’. Plus, its mandate to buy up securities and lever up its balance sheet isn’t just limited to sovereign debt and mortgages; it’s targeting Japanese stocks, Japanese real estate investment trusts, and even US stocks.
If the rationale to invest in stocks here is that their prospective returns are better than bonds, then stocks are really compelling in Japan, with the Japanese government ten year bond yielding less than ½ of one percent.
Other factors are starting to work in Japan’s favor. A weakening Yen makes their exports more attractive. The precipitous fall in the cost of fossil fuels is manna from Heaven for this island nation, with little in the way of their own energy resources. Given how large the US market is for Japan, an improving economy here is a big boost. We think large cap, large franchise Japanese stocks can make sense for the well diversified portfolio.
It was a tale of two markets in 2014, at least in the second half, when crude oil dropped nearly 40%. No one’s quite sure what triggered it; while some attribute it to North America’s surging production, but that didn’t just start in July 2014, when the collapse started.
In any event, investing 101 says buy when stocks are cheap. Economics 101 says the best cure for low prices is low prices. The current low price for fossil fuels spurs consumption, reduces supply, and gives pause to those who would transition to non-fossil fuel energy sources.
Given that no one knows how long the commodity sell off will continue, a focus on franchise companies, with very low debt and long experience in volatile markets, makes sense. While you are waiting, many energy stocks sport attractive dividend yields.
The combination of rising interest rates and an improving economy can prove to be a real tailwind for this sector. An uptick in borrowing rates allows them to charge more for their loans and earn more on their portfolio, while greater economic activity will spur loan growth and business.
Commodities were banged up in 2014, down over 14% as the year draws to a close. A surging US Dollar and weakening global demand, particularly from China, a voracious consumer of metals in the previous cycle, weighed. As a result, the stocks of commodity companies tumbled. The strategy is to buy a very well-managed, market dominating, commodity stock to play the inevitable rebound.
These stocks are core portfolio holdings, as demand tends to be constant through thick or thin. If there’s a strong brand name involved, premium margins are available. Those products are sticky; who’s going to switch from their favorite gum or chocolate to save a quarter?
Healthcare Continues Strong
Healthcare stocks had a phenomenal 2014. The Affordable Care Act is bringing in lots of new customers, while imposing neither regulations nor price controls as onerous as feared.
Utilities Still Offer Yield
Utilities had an excellent year in 2014, up over 22% as the year comes to a close. Utilities rode a tail wind of lower interest rates; these good yielding steady eddie companies are seen as bond surrogates.
Opinions differ as to the future; those who see interest rates rising are wary of the group. To be truly diversified you can’t build your portfolio geared only to higher rates; what happens if you’re wrong?
Note: David G. Dietze, JD, CFA, CFP™ is President and Chief Investment Strategist of Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Avenue, Summit. CNBC has named Point View number 5 on its list of the top 100 American fee-only wealth managers. See http://www.cnbc.com/id/101619698 The full-length version of this article is available at: www.ptview.com.