Interest Rate Sensitivity and Low-Vol Investing

Interest rates have a significant impact on security prices, according to an article by Morningstar’s Alex Bryan, CFA, the firm’s Director of Passive Strategies Research, North America. Bryan writes that, unlike bonds, which have a finite life and fixed cash flow, the impact of rates is more difficult to anticipate for equities. He explains his theory that firms that are “more sensitive to the business cycle tend to experience greater cash flow growth during economic expansions” and, therefore, should do better in a rising rate environment. Bryan discusses his research that shows high-dividend-yielding stocks, those stocks in more defensive industries, […]

Pimco Strategist on Trump and the Global Savings Glut

A study conducted by economists at the Bank of England found that the vast majority of the 450-basis point decline in global interest rates since the 1980s was due to a decreased desire in saving and investing rather than lower potential economic growth. This according to a Bloomberg article by Pimco managing director Joachim Fels, who shares his thoughts on the potential impact of the Trump administration in this regard. Fels argues that “quite a few aspects of President-elect Trump’s potential policies might actually work toward lowering, not increasing, that natural or equilibrium interest rate rather than increasing it.” He […]

Active Investors Get a Chance to Shine

From the investor’s standpoint, a low level of unemployment isn’t necessarily good news, says a recent Bloomberg article. However, it can bode well for active versus passive investors. When more people are working, it says, “Wage growth can exceed economic growth, putting pressure on corporate profit margins. Interest rates can rise, tightening financial conditions. Inflation can rise, putting more pressure on central bankers to remove liquidity from the system.” For active investors, however, it presents the opportunity to outperform benchmarks, “which are much lower hurdles to beat than in the early investor-friendly stage of an expansion.” During the current, long-winded […]

Hedge, But at What Cost?

Crowded trades can undermine investors’ attempts to find safe havens, according to an article in last month’s Wall Street Journal. “Now it is more expensive to insure against losses in utility and consumer-stapes stocks and related trades than numerous assets world-wide.” Defensive stocks “soared” in the first half of this year, the article says, “as ultralow bond yields drove money flows into shares of high-dividend companies.” But this flow has fallen off in the third quarter “as valuations for the sectors reached multiyear highs.” And if the Fed raises rates in December, the effect on “bond-proxy” stocks such as utility, […]

What Rising Rates Mean to Low-Vol Investors

“Confusing risk with volatility can be dangerous,” says a recent report by Greenline Partners, as it “can lead to seeing things that do not exist.” This according to an article published this past May in Chief Investment Officer. Greenline, the article states, found that low-vol strategies outperformed the index by nearly 1%-2% annually over the last 50 years, but two-thirds of this period coincided with falling rates. A recent report published by the asset management firm said, “We think this environment gave low-volatility investing a tailwind that will likely not repeat going forward.” Future return expectations should be discounted “especially […]

How Could Rising Rates Affect Small-Cap Stocks?

As we continue to wait for the Fed to move on rates, questions loom as to how a rising rate environment will affect the markets. In a recent article for Proactive Advisor magazine, Validea CEO John Reese shared his thoughts on how this could specifically impact small-cap stocks. Conventional wisdom, he explains, says that rising rates can negatively affect small-cap performance (companies with market capitalizations of between $250 million and $2 billion) since: It leads to increased costs of the capital necessary for growth. Small-caps tend to be more dependent on future revenue streams, and higher rates generally lead to […]

Jason Zweig on Why Interest Rates Matter

When shopping for sale items, it’s customary to look at the price tag and see how much an item has been “marked-down”. You’d rather browse the “30% off” rack than the racks with lower discounts. Why? Because it affects the item’s value. On a much more sophisticated level, stock values and interest rates have a similar relationship. In a recent Wall Street Journal article, Jason Zweig describes how interest rates are an important factor when determining the intrinsic value of investments (the current value of the cash they are likely to generate in the future). Here’s how it works: If […]

To Bolster Returns Large Investors Will Have to Come Up the Risk Curve

Gone are the days when a conservative bond portfolio will provide a decent return. Low interest rates and a sluggish economy are forcing investors to accept higher risk to get the same returns they would have twenty years ago (by buying and holding investment-grade bonds). The Wall Street Journal recently reported that research conducted by Callan Associates, Inc. (which advises large investors)  shows that in order to make a 7.5% return today, a portfolio’s bond component would have to shrink to roughly 12% and private equity and stocks would have to account for nearly three-quarters of the investment pool. Jay […]

The Only Fed Voice that Matters – Listen to Yellen

James Grant of Grant’s Interest Rate Observer recently weighed in on Federal Monetary Policy in a Bloomberg Report video. Grant believes the Fed “conceives its principal work to be suppressing or distorting the free play of interest rates or prices.” Asked what the Fed should do or not do to make the prices rule, Grant said the Fed has missed its mark, explaining that it had six or seven years to orchestrate a return to normal interest rates but are now confronted with moving to restore a normal structure of interest rates. Grant opined: “what the Fed ought to do […]

The Importance of Dividends for the Long Term Investor

Dividend producing stocks are attractive and offer investors compelling values (subscription required) according to this AAII Journal article by John Buckingham, director of research and chief portfolio manager of AFAM Capital and editor of the Prudent Speculator newsletter. Keep in mind, the article was written in mid-2015, but many of the statistics in the article are long term in nature and we believe investors seeking and investing in high dividend paying stocks should take note of this research. There are a number of factors that make Buckingham positive on dividend oriented stocks. First off, Buckingham notes that non-dividend payers have […]

Bond Market Volatility Likely to Continue in 2016

Short and long-dated Treasuries have nearly identical returns this year, with Barclays indices showing 0.71% returns for 1-3 year Treasuries and 0.68% returns on the 20-year-plus index. Expectations that the Fed will make successive rate hikes may favor long-dated Treasuries, however. Rick Rieder of Blackrock says such successive increases “will benefit the long end (versus) the short end”, so “the long end is the better part of the curve.” He said gradual rate increases will benefit 30-year Treasuries and avoid a flood of supply that would depress prices. Nonetheless, Rieder said he is moderately bullish on short-dated Treasuries currently, while […]

Dollar Could Weaken Even As Fed Embarks on Rate Hiking Cycle

The rationale for predictions of continuing strength in the dollar are well-known but may be wrong, writes Ben Levisohn for Barron’s. Fundstrat strategist Thomas Lee looked at the last 11 tightening cycles (when the Fed began raising rates) and found that five involved “divergence” from European central banks (meaning that they were easing), which lasted a median of 17 months. During such times, according to Lee, the dollar has typically weakened a median 6.6% during the six months after such a Fed interest rate rise.  A weaker dollar could significantly benefit U.S. corporations that have suffered recently. Lee “estimates that […]

Low Rates Could Remain Stubbornly Low for Longer than Most Think

The Fed’s decision to raise short-term interest rates does not necessarily signal the beginning of a return to pre-2007 rates (averaging 7.3% from 1970-2007), writes Neil Irwin, Senior Economics Correspondent with the New York Times. Despite widespread predictions of sharply rising rates, Irwin notes that “interest rates historically are most closely tied to inflation.” Not only is the inflation rate currently very low, but most signs suggest it is likely to stay that way for some time. The Fed has been trying to increase inflation to a mere 2%, while Treasury bond prices “predict annual inflation in the United States […]

Low Rates Could Remain Stubbornly Low for Longer than Most Think

The Fed’s decision to raise short-term interest rates does not necessarily signal the beginning of a return to pre-2007 rates (averaging 7.3% from 1970-2007), writes Neil Irwin, Senior Economics Correspondent with the New York Times. Despite widespread predictions of sharply rising rates, Irwin notes that “interest rates historically are most closely tied to inflation.” Not only is the inflation rate currently very low, but most signs suggest it is likely to stay that way for some time. The Fed has been trying to increase inflation to a mere 2%, while Treasury bond prices “predict annual inflation in the United States […]

Cooperman Reiterates Positive Market Outlook. Says Oil in “Bottoming Zone”

Leon Cooperman of Omega Advisors lists a host of reasons why he remains optimistic about the market, telling CNBC that this bull market is not yet over. First on this list is that if a bear market were to begin today, it would be the first bull market to end without the Federal Reserve actually tightening interest rates. In the eight market cycles since the mid-1950s, stocks, on average, have gone on to produce gains for the 30 months after the first rate hike. The second point he makes is that bear markets take place in advance of a recession, and […]