Insights & News

The FAI 3Q 2015 Investment Outlook Continued

Yield on 10-year U.S. Treasury Bond past 3 months from Chicago Board Options Exchange 



The  following  chart  from  helps  us  see  the  historic  relationship  between  the  Fed Funds “zero-bound” rate, the periods of Quantitative Easing and the direction of stock prices. 



Near term, the Fed’s decisions will be the main influence on U.S. bond prices; we continue to think that no matter when they make their first move, they will elevate very, very slowly.  

World-wide, we think the perception of credit risk is the biggest variable… followed by currency issues. We’re not bullish on either. The 10-year German bund yields 0.65% compared with 2.2% for the  U.S.  version.  For  European  investors  who  expect  a  weaker  Euro  ahead,  the  U.S.  yield advantage  with  a  currency  kicker  may  well  be  irresistible.  That’s  why  we  include  a  modest position in 10-year Treasuries to augment our otherwise short-maturity bond portfolio. 

Abroad, we won’t hazard a guess as to how things will sort themselves out except to say we think foreign bonds are an unattractive asset class due to uncertainties. So what about stocks? 

Outlook for Stocks 

Stock  prices  are  usually  most  influenced  by  the  outlook  for  corporate  earnings.  According  to FACTSET, second quarter S&P 500 earnings are estimated to have dipped 4.5% year-over-year. The main villains: a lower oil price and strength of the dollar versus foreign currencies. But for the strength in other sectors, these could have caused an estimated 12.6% quarterly earnings decline. Consensus estimates for all of 2015 are for S&P 500 operating earnings of about $119 a share, up 5.3% year-to-year… all of the gain coming in the fourth quarter. 

Squinting into the forecasting fog of 2016, consensus analysts’ estimates call for a 12% boost in S&P 500 profits. This seems quite optimistic to us since a) we see only about a 4% nominal GDP growth  next  year,  b)  U.S.  wages  are  picking  up  (connoting  pressure  on  currently  high profit  margins),  c)  energy  sector  earnings  may  be  no  better  than  flat,  and  d)  the  dollar’s uptrend against  currencies  in  Europe,  Japan  and  China  could  well  persist,  since  the  central banks  in  those  regions  are  in  brisk  monetary  ease  mode  while  our  Fed  seems  committed to boosting interest rates. U.S. stocks remain historically dear, yet, because global capital may flow toward America, our U.S. equity allocation is only modestly defensive… for now. 

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This memo contains the current opinions of the author, J. Michael Martin and  FAI Wealth Management.  These opinions are  subject to change without notice. Any views expressed are provided for informational purposes only and should not be construed in any way as an offer, endorsement, or inducement to invest. This material should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Past performance is not indicative of future performance. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest for a long-term especially during periods of market decline. Investors should discuss any investment with their  personal  investment  counsel.   No  part  of  this  material  may  be  reproduced  in  any  form,  or  referred  to  in  any  other  publication, without attribution.

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