Happy 4th of July!
1. I Walk the Line. Since the lows hit in March of 2009, the S&P 500 and the Dow Jones Industrial Average have risen 146% and 121%!. The market has certainly rewarded the long term investor. Yet, the retail investor has not fully embraced the stock market as many remain on the sidelines as cash balances in bank deposits and money markets continue to be historically high. Many wealthy investors have shunned the market. The bond market has more recently outperformed stocks for the six months in 2014. Forecasters are quick to say that interest rates are going to rise in the coming months, but even the savviest prognosticator has been unable to accurately predict when short term rates rise!
2. Folsom Prison Blues. Supposedly, under a deregulated financial system, the market will set rates and not Central bankers. QE III has artificially forced rates down as the Fed balance sheet now exceeds $4 trillion in U.S. Treasury and Mortgage backed securities. Inflation and unemployment data suggests the Fed has not achieved its stated targets for these economic juggernauts and that continued open market purchases will persist for the next twelve months. Ultimately, the attractiveness of financial assets will wane and should diminish the value of bonds and stocks.
3. Ring of Fire. With the rally in bonds and the lower interest rates, the financial markets are not predicting any inflation for the coming months. Deflationary pressures are definitely clashing with policy and until we achieve a higher employment rate, there is very little chance that we have good old-fashion wage push inflation. More recent housing data suggest that housing has definitely stabilized. Yet, housing starts remain almost 500,000 less than previous recovery periods. The good news is that housing prices in most major markets have improved and that construction is occurring. As equity values improve, the rising net worth for Americans should be very positive for the overall economy.
4. Hurt. Since 2009, the price earnings ratio for the S&P 500 has risen from 11 times earnings to 15.4 times 2015 earnings. Only during the late 1990’s did price earnings ratios trade higher obtaining the 18 times earnings in 1999. Many leading market forecasts indicate that price earnings ratios can further rise. The markets have definitely climbed the wall of worry over the past eighteen months with no correction exceeding 10%. Yet, we are not experiencing over optimism, though shadows of irrational exuberance have crept into the market. Short-sellers have experienced a good deal of pain as this market continues to sneak upward.
5. Jackson. We believe that the bond market is overpriced at current levels and that ultimately bond yields will rise. The economy should be rocking and rolling in order for yields to rise. Unemployment should be below 6% and real inflation will be creeping into all areas of the economy.
6. Sunday Morning Coming Down. Investment strategy in the stock market will definitely favor economically sensitive issues which include the industrial companies as they are directly linked to economic growth. Companies that have benefitted from deflationary forces should be avoided as rising commodity prices negatively impact profit margins. During this period of time, financial institutions will benefit if real estate prices rise, but will definitely suffer from rising interest rates. We continue to avoid financial stocks including banks and insurance companies.
7. Ballad of a Teenage Queen. From a geographical sector basis, we do like the multinational companies which include pharmaceuticals, oil, and chemical companies as they will benefit from economic recovery around the globe. Selective markets like Australia, the Far East, and more recently Europe have improved. We would avoid the South American markets and Russia and China.
8. One Piece at a Time. We do like mid-capitalization stocks being defined as $1 to $10 billion in market capitalization. We believe that larger companies will continue to spin-off and sell lower performing subsidiaries and that the smaller and mid-capitalization companies will experience better profitability and enhanced earnings growth over the next five years.
9. Man in Black. The list of financial worries is long. Russia is still dabbling in the Ukraine as it now has secured Crimea and now controls all natural gas flows from the east into Europe. Europeans are oil and gas dependent and are at the mercy of the Middle Eastern oil and gas supplies. Russia immediately raised gas prices on the Europeans. Additionally, we are watching Iraq erupt in civil war. The ISIS has mounted terrorist attacks all throughout Iraq. The Kurds have secured the oil refineries in Eastern Iraq and Israel Prime Minister Benjamin Netanyahu has endorsed the Kurdish people to have their own separate government from Iraq. Other hot spots have developed in other parts of the world which include Syria, Nigeria and North Korea. In spite of all of this, the financial markets have shrugged-off the otherwise dire outcomes and have risen for the past twelve months.
10. A Boy Named Sue. For the coming twelve to eighteen months, we are very neutral on the markets. We expect financial hiccups to appear on the horizon. The Federal Reserve continues to be an enabler for a multitude of bad policy measures originating from Washington. Easy money being financed at or below 3% has created monster projects in highway construction, bridge repairs, social programs, and government health insurance.
We continue to be honored to serve as your investment advisor. We believe that long term investing will always be rewarded. We look forward to hearing from you in the future and hope you have a wonderful 4th of July holiday as we celebrate the birthday of the greatest nation in history.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027
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