Great 30 minute video explaining how the economy works by Ray Dalio of Bridgewater. For those who follow him, it will come at no surprise that the focus is on one of the most misunderstood components of the economy… Credit and debt.
There has been a lot of talk these last few months about what will happen to portfolios when the Fed eventually raises interest rates. The Fed will only make changes to its low-interest policy when the economy confirms it will continue to improve. The earliest the Fed would make any changes would be in September, although some experts predict it won’t happen until 2014. Below are a few key points that can help put this into perspective and explain what this means for you:
If interest rates were to rise…
- Changing trends could provide new investment opportunities.
- We could see certain domestic bonds decrease in value. Not all bonds but certain types, such as long-term government backed bonds, may be more affected than others when rates do rise. We see opportunities in short duration funds or funds with global diversification or a variety of sub asset classes (such as corporate bonds, senior loans, convertible bonds).
- It could strengthen the dollar thus making stocks more attractive (both small and large cap could be buying opportunities).
- The financial sector (regional banks, insurance companies, etc.) could be an opportunity as they historically perform well during periods of rising interest rates.
- Large Multinational companies based in the US could see their values go down as a result of the strengthened dollar, while multinationals based outside of the US could be a better investment.
NY Times just released the results of a fascinating study about upward mobility in the United States.
The results show that a child who grows up in Bridgeport, CT area with parents who earn in the 10th percentile ($16k), ends up, on average, in the 38th percentile.
These results are indicative of the whole northeast, too. Unfortunately, the south isn’t so lucky.
It’s been a big week! But don’t lose focus on the long term.
Too many people are making a big deal over the Fed’s announcement earlier this week, resulting in traders kicking up a lot of dust in the markets and the talking heads dissecting the meaning of the announcement. Let’s keep a few things in perspective:
1) Nothing substantially new was stated except that the Fed’s bond buying may begin to taper off at the end of this year as opposed to early next year.
2) This was not unexpected news. This was already hinted at a few weeks prior. We already knew this.
3) The life support, QE3, or Fed’s efforts to help the economy must end someday. Did everyone forget that it was bound to happen?
4) Bernanke even stated that any policy changes would be contingent upon the economy’s CONTINUED growth. As the economy strengthens and can stand on its own, the Fed would reduce aid accordingly. And at that time, shouldn’t it be celebrated rather than shunned?
There is some volatility in the markets as a result this announcement. It may continue for a while. Is it a little speed bump or is it the sign of something more? We will wait for the dust to settle to see where things stand. We may see opportunities as the market rebounds.
In reviewing asset class trends for The Active Asset Allocation Portfolio, I saw a divergence of two asset classes – emerging markets and developed markets. I wanted to explore why this is happening.
We find this to be a rather unique situation, as emerging markets tend to be the more volatile cousin of the developed markets. Emerging market highs are higher than developed markets and their lows are lower. But this time is different. Emerging markets had a brief period where their trends were positive compared to the 200-day moving average but struggle to stay above the moving average for a sustained period of time, while the developed markets continue to their positive trend. They’re not moving together, an unusual occurrence. What’s causing the emerging markets to act the way they are is tough to pinpoint, but below are a few obstacles that could be contributing to their sluggish performance.
Obstacles facing emerging markets:
– The United States is re-gaining a competitive advantage by leveraging technology in manufacturing. This is forcing businesses to reevaluate the cost effectiveness of manufacturing in China and other countries that once had a low-cost connotation associated with them. (Source) and (Source)
– The unintended consequences of currency devaluations are effects that can spill over into other countries. In this case, emerging markets are affected by the currency devaluation happening in developed countries, leading to increased wages and possibly increasing inflation. If the Japanese Yen loses value then its exports become cheaper and more attractive than goods from emerging markets. (Source)
– Exports continue to lag as demand remains low. Developed economies have seen growth in health care, industrials, consumer discretionary and consumer staples, none of which are especially strong industries in the emerging markets. (Source)
Advantages for emerging markets:
– The obstacles mentioned above could be be affecting emerging markets on the short term. Many of the sources listed above remain bullish on this asset class for the long term. Maybe this is a buying opportunity?
– If you look at some of the largest emerging market ETFs, you’ll see about 40% of their holdings are in companies located in China, Brazil and Taiwan. Finding a more diversified security or one that minimizes volatility may be an option to consider, such as a low volatility ETF.
Currently, we see no confirmed trend in the Emerging Markets. The BRIC’s, the largest and most commonly thought of Emerging Markets, have not been performing well for reasons mentioned above. But these are not the only emerging markets in the world. There are plenty of others and some of those may be worthy investments either now and in the near future.