Historically low interest rates, Trump vs. Clinton, Britain leaving the EU, 3 terrorist bombings over the weekend, and who knows what else is to come. The world seems to be becoming a dystopia (a community or society that is undesirable or frightening). You may be getting worried. I know I am.
However, as it relates to your finances, I try to keep an open, and hopeful, mind. This weekend I read this quote from John Bogle, the founder of Vanguard:
- “Well, you can only control what you can control. I think whatever your view of the world is, you have to invest. You can’t put the money in the mattress and in this day and age of low interest rates, you can’t put it in the money market fund or a bank CD, so invest, you must. Now, you might want to invest regularly. For people that are investing regularly, I would say for god’s sake don’t stop investing now. I know the market is not doing much this year, just about where it started, a little bit down but not much, and bond yields are still very low, actually lower than they were at the beginning of the year, but you have to put your money to work. The alternative is – I mean, the only way to guarantee you will have nothing in retirement is to invest nothing along the way. So, you have to take your chances.”
I have to agree with him. My task is to help you do that (invest) as prudently and wisely as possible.
Here is what I am watching for the next 6 months:
- Brexit – At the moment, this is more of a political crisis than a financial crisis. It should not be too impactful on the US as ~70% of U.S. companies’ revenues are domestic and the share of world GDP in 2015: England 3.9%, Germany 4.6%, France 3.3%, U.S. 24.4%. (source: Raymond James & Associates). What I am watching is does the British vote to leave the EU spread to other countries, specifically Italy which is holding a similar referendum in October 2016.
- US elections – Wall Street widely expects Clinton to win the presidential race, so if Trump comes out of the convention stronger, the markets are likely to react. From my perspective, how the Congressional elections go will have more long-term impact than who wins the White House.
- Interest rates – right now US Treasuries are the prettiest house in an ugly neighborhood. Therefore I anticipate US interest rates staying low as demand for US Treasuries remains high as foreign investors flee negative interest rates in their local government bonds. Central Banks in Britain, the EU, and Japan are likely to increase monetary easing, which probably keeps their interest rates in negative territory. I expect the Federal Reserve will not raise interest rates until after the elections in November 2016.
- Equities – are a double edged sword. Low interest rates make equities a necessary option for investors seeking yield. The chart below shows that the dividend yield on the S&P500 index is currently higher than the interest rates on a 10-year US Treasury. As I am writing this note (11:40am EST 7/5/16) the 10yr US Treasury is yielding 1.38%, while the S&P500 Index is yielding 2.10% or 52% more (source: Factset.com) This should be supportive of equity prices.
Equities – (continued) The potential risk to equities is that we are close to all-time highs (basis S&P 500) and valuations, as measured by Price/Earnings ratio are also high. The key here is how 2nd quarter 2016 corporate earnings come in. Reporting starts next week. Year-over-year comparisons should be decent and the rebound in oil prices should help energy company earnings. I will be watching what multi-national corporations say about the impact of Brexit.
These are the themes I am following as we start into the 2nd half of 2016. As always, I will be on the lookout to avoid danger and take advantage of opportunities.
July Calendar of Events (comments and additions for future months are always welcome)
- July is National Picnic and National Parks month – why not go to a national park and have a picnic – a 2 for 1
July 1st Bureau of Internal Revenue (the IRS) founded in 1862– betcha nobody celebrates this birthday
July 4th Independence Day
July 11th My daughter Ryan’s birthday
July 17th National Ice Cream Day – just might be my favorite day of the year!
July 29th National Lasagna Day
I hope you find this report helpful. Please share it with anyone you feel would benefit from the information.
Sources: Raymond James & Associates, Factset.com