Contributed by: Angela Palacios, CFP®
During a very busy fourth quarter we spent some time reflecting and learning from respected experts in our industry.
October 15th Charles De Vaulx of IVA (International Value Advisors) visited our offices to participate in The Center’s first annual chili cook off. While stopping by, Charles discussed his views on global markets and economies as well as the lack of buying opportunities out there yet.
Charles De Vaulx, Chief Investment Officer and Portfolio Manager for IVA (International Value Advisors)
He debunked the argument by many that low interest rates justify higher price-to-earnings ratios. He states rates are low because the world is imbalanced and de-leveraging hasn’t actually happened yet. While many households have de-levered, governments have increased their leverage. Debt has simply changed pockets but it is still all out there.
Charles also argued that circumstances are very complex right now with low interest rates, countries devaluing currencies, and deflationary pressures despite the availability of low cost debt. Even the sharpest minds are struggling knowing what to do right now.
Some of their best decisions have simply been to stay out of trouble. They still stand at nearly 40% in cash because they argue cash is what is needed to invest with the buy low/sell high mindset.
Mathew Murphy, Vice President and Global Fixed Income portfolio specialist for Eaton Vance
In December, Jaclyn Jackson listened to Mathew’s views on the global fixed income markets. He stated the markets are anticipating the Federal Reserve Board (FED) to hike rates twice for a total of .5% increase in 2016. The FED wants to keep monetary policy loose and continue to increase the labor force.
On inflation, the Fed is targeting is 2% PCU (Personal Consumption Expenditure Index) – which is very difficult to generate. It is around 1.5% currently. Fed is continuing to let the economy run hot because of this. In the 1980s, the dollar was strong and by December 1985 OPEC pumped for market share in the oil markets (similar to today). The Fed was concerned about strength in the dollar and lowering oil prices. In 1985, in response the FED stopped hiking rates and inflation began to peak. Today, Mathew believes the market is not pricing in interest rate hikes correctly; we are at risk of having more. It is probable the Fed will have to move faster than the market anticipates.
The credit story remains on a positive note here in the U.S. Mathew doesn’t see a recession approaching, and he doesn’t think the credit cycle will turn over despite the issues in bond market liquidity in December.
Mark Peterson, Director Investment Strategy and Education from BlackRock on low returns and reaching for risk
Mark feels there is a lot of risk in portfolios today. Low returns are a concern and causing money managers and individual investors to reach for returns and thus taking on more risk. Low volatility for years lulled investors into a false sense of security. He favors municipal bonds as he believes they are still reasonably priced and offer tax advantages. As a result, Mark feels high quality municipals should be a good buffer to stock market volatility.
He also argues traditional equity diversification does not help the way it has in the past; it doesn’t reduce volatility the same way because correlations between markets are so much higher than they were 15-20 years ago. He suggests the way to combat these changes in your portfolio is to utilize low-volatility equities and alternative equity strategies like Long/short and global macro strategies.
Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the professionals listed and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with and does not endorse the opinions or services of Charles De Vaulx, Matthew Murphy, Mark Peterson, International Value Advisors, Eaton Vance, or BlackRock. Past performance is not a guarantee of future results. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investments mentioned may not be suitable for all investors. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.