Investment Insights: 3rd quarter, 2014 review
By Mike Jones, posted October 16th, 2014
Just because you hear something often enough and loud enough doesn't make it true.
Sound bites about the investment environment proffered by the media - even the financial media - may not be a solid foundation for investment decision making.
As we enter the 4th quarter of 2014, here are two of those "sound bite ideas" I've heard making the rounds.
1. The US stock market is too high. At the end of the 3rd quarter of 2014, the price-earnings ratio (P/E) on the S&P 500 was 18.48. The average is 15.52 and most bull markets of late have run out of steam over 20. If you want to feel good about owning stocks, read what Morningstar writes:
First, a moderately overvalued market can still deliver strong total returns for years. Second, normal valuation levels can fluctuate significantly over time, and there's no guarantee that the past will be an accurate gauge of the future. Lastly, we can't forget the potential for growth in intrinsic value. Over a long enough investment time horizon, common stocks are almost certain to outperform bonds and cash, especially considering current interest rates.
Mid-way through October, the stock market experienced several days of higher than average volatility. Several days saw triple digit loses. It's too early to tell if this is anything significant, a correction or even the beginning of bear market. The point is that markets fluctuate for a variety of reasons, not simply the nominal value of a particular index.
2. Interest rates are going much higher. When 2014 began it seemed as though every industry piece I read expected interest rates to rise this year. In fact, 4% on a 10 year U. S. Treasury Note was the consensus. Here we are in October and that number is 2.04%. That's right, 2.04% per year for a commitment of 10 years. Thankfully, yield on corporate bonds have not dropped that much, leaving investors with opportunities for low but respectable yields. The fed has signaled that it wants to start raising rates next year but also that any decision must be "data dependent." With the world struggling to achieve robust growth I wouldn't expect substantially higher interest rates any time soon.
Financial assets did lose steam in the 3rd quarter 2014. Worldwide growth appears to be slowing and the end of the Federal Reserve's highly accommodative policy has reached its peak. Certainly the question on investors' minds is could this be the pause that refreshes or is it the beginning of a much larger sell-off? It is too soon to know, but we will be monitoring the situation on a daily basis.
The analysis which we performed at the end of the 3rd quarter did produce the following portfolio adjustments in most Momentum Select portfolios.
Cash: Remained about the same.
Fixed Income: There was an even further reduction in allocation to interest rate sensitive bonds and more dollars allocated to "real return" products.
Equities: Overall allocations to stocks remained the same (for now) but money was transitioned away from the large cap blue chip U. S, stocks and more into international stocks.
Mike Jones is Managing Director / Investing Group of Argent Advisors, Inc. Email him at email@example.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5844. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc. No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.