February 5, 2015
The first month in the stock market for 2015 has been like a heavyweight bout between the bulls and the bears. The question is whether the decline in commodity prices is foretelling a dramatic slowdown in global growth, or instead be a stimulant to global growth. Each camp has good points. So far the bears have the first round. But let's have a deeper look.
The bulls believe a dramatic economic slowdown is unlikely for four reason: accommodative monetary policy by virtually all of the world's central banks; low energy prices that will boost consumer health and spending; low interest rates that keep borrowing costs low; and rising employment. Bulls believe these components create a constructive environment for growth and make stocks a relatively attractive opportunity.
The bears believe the clock is running out on the economic expansion and stock market, and that the safety of bonds is imperative at this point. They believe this because: weakness in Europe, Japan, and China is likely spill over into U.S.; beggar-thy-neighbor monetary policies are a lose-lose game; strong dollar will hurt U.S. exports; and equity valuations are above long-term averages.
There's no crystal ball to foretell which camp is right. But we can be quite confident that watching this battle play out will be uncomfortable. Ultimately I believe that the bulls have the better side of the argument, and that a recession is unlikely. Since The Great Depression the primary causes of recessions and ensuing bear markets have been monetary tightening (1980, 2007), high energy prices (1973, 2007), extreme market valuations (1999, 2007), or war (1945, 1953). None of these conditions seem to exist today. Further, recessions and bear markets tend to be tipped off by unexpected events. To the bear's points, that Europe, Japan, and China have disappointing economic growth is hardly a surprise and it's hard to find a market participant not talking about international currency headwinds. The best reason to be cautious is that market valuations are above average, but not by a wide degree and it's far from universal.
Wayne Gretsky famously quipped that he was a great hockey player because he "plays where the puck is going to be". The same is true for great investors. In 2014, utilities and REITS were the best performing sectors and energy the worst. Right now valuations in the utility and REIT sectors have never been higher. Meanwhile valuations in the energy sector have rarely been lower. The point is that you can find inexpensively priced investments in today's marketplace; you haven't missed the boat.
Investing 101 teaches us that returns are primarily a function of price [Returns = ((Selling Price - Purchase Price) / Purchase Price) + Yield]. The buy-low sell-high function of this equation gets most of the attention; the yield deserves it. Yield from dividends is the single best source of returns over the long-term. As battles between the bulls and the bears play out and begin anew, focus on quality companies selling cheap with a good yield. If you can do that without getting caught up in the day-to-day turbulence, you are well positioned for investment success.
Brennan R. Redmond, CFA - Senior Vice President
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities.)