Weekly Market Commentary 7-9-12
The economic data over the last few weeks continued to confirm what we had suspected for quite some time. This is an “L” shaped economic recovery that has made traditional static asset allocation difficult. When we first started writing this blog in the fall of 2010, we discussed the dynamics of a slow growth economy and investment themes that would fit this macroeconomic environment.
If you look at jobs, you can see how slow the growth has been from the BLS data:
Same for GDP according to the BEA:
Housing prices tell the same story from Standard and Poor’s:
Given this type of a macro environment, we listed a handful of investments themes at the bottom of that post in 2010, including:
- Looking for yield, yield, yield
- US Mega Cap Companies with large cash balances paying dividends
After Friday’s dismal jobs report it appears our forecasts for a slow growth economy are continuing to play out. Unfortunately, we see very little on the horizon to shift our view.
We all know the list of worries our market must climb:
- European recession
- Slowing across the BRIC countries and other emerging economies
- Corporate earnings growth rolling over in the US
- Political grid lock and polarization
- The fiscal cliff
The Importance of Getting Paid
So, what are some of the ways an investor can get paid today while maintaining the long term benefits of a broadly diversified asset allocation?
- High quality companies with stable cash flows
- Lower volatility and “boring” equities
- Companies with a sustainable and strong dividend
- High yield fixed income
- Covered call strategies
- Long/Short funds with a strong track record.
These ideas aren’t for everyone, and every portfolio. They should be viewed with the appropriate time horizon perspective, and risk tolerance levels. We want to continue to remind investors that opportunities for returns must be viewed in the context of your time horizon and future needs.
I do see one political scenario that could lead to a strong rally in our markets. I would like to preface it by saying this is not a consensus view and you won’t find many in my profession sticking their necks out with this scenario. With that said, here it is:
It's possible the economic headwinds will blow strong enough in the coming months for the President to try and trump Republicans by proposing his own economic legislation well before the election.
It could be an extension of tax cuts, or a deferral of federal sequestration on the cuts that would take place in January. It could even be something as simple as an extension on the tax rates for dividends and interest. By simply proposing one or all of these ideas, it would force the Republican's hands into action for fear of looking like obstructionists while "Rome Burns". This could stimulate a nice market rally.
While I wouldn't bet too much on this scenario, as it is certainly wishful thinking, it's worthy of consideration. If all else fails, the Fed has made it very clear they are still willing to throw in the kitchen sink to bail out the markets again. In the short run, the mantra, “don’t fight the Fed,” reigns true.
In the meantime, why not get paid with dividends to wait through the significant market volatility.
Tim Phillips, CEO – Phillips & Company