Amidst Conflicting Signals, Keeping Cash May Be Prudent

In an environment where markets look expensive and are sending conflicting signals, keeping a store of cash might not be a bad idea. This according to a recent article in The Wall Street Journal. According to the article, lower bond yields and swollen equity markets are “sending conflicting signals; the former reflecting the lackluster picture for inflation; the latter hopes for growth.” Further, it says, the high level of global central-bank liquidity is “past its peak” with the Fed raising rates and the European Central Bank moving away from loose monetary policy. “In this environment,” the article states, “faced with […]

Klarman Warns of Risks to Investors

Risk is the most important consideration when investing, and investors are being too trusting. This according to a recent Business Insider article reporting on a client letter from hedge fund manager Seth Klarman. The hedge fund manager (who oversees approximately $30 billion) shares his view that, when share prices are low (as they were in 2008 and early 2009), risk is “usually quite muted while perception of risk is high.” By contrast, however, he argues that “when securities prices are high, as they are today, the perception of risk is muted, but the risks to investors are quite elevated.” According to […]

Zweig: Emerging Markets Look Good, But Don’t Rush In

Funds are pouring into emerging market funds, with one-twelfth of total holdings having come in over the past 90 days, writes Jason Zweig of The Wall Street Journal. Presumably, he says, the heavy inflow is in “hot pursuit of high recent returns” (the asset class is up 12.4% this year). While participating in these funds is a good idea, Zweig says, investors should be careful not to rush in. “These stocks aren’t so much absolutely cheap as relatively cheap,” he argues. According to Chris Brightman, chief investment officer at Research Affiliates, emerging markets are “half the price” of U.S. stocks. […]

Sexy Companies Don’t Necessarily Make Good Investments

Snap Inc. (the maker of the popular social app, SnapChat) has been getting a lot of attention of late, according to a recent article in the Financial Times, and not just because of its imminent initial public offering at a time when such events are a rarity. The article states, “It’s a company reaching out to the public markets even as it loses money hand over fist,” citing data from Dealogic that says Snap is expected to raise more money than “all venture capital-backed firms joining the public markets in 2016.” Citing new research from Charles Lee and Ken Li […]

Buyer Beware of Companies Carrying Heavy Debt Loads

A decade of historically low interest rates has encouraged businesses to increase leverage and this could prove dicey for investors, says a recent Barron’s article. According to Morningstar fund analyst Kevin McDevitt, companies have been refinancing or borrowing for share buybacks, not necessarily to invest in existing businesses. “The leverage,” he says, “is an added risk not only to the individual companies, but also to the funds that own them.” Morningstar research found that, in the wake of the 2008 crisis, funds with high debt/capital ratios “dramatically underperformed low debt/capital ones and the market, losing about half their value, while […]

Valuations Matter in Factor Strategies

It’s a familiar investment conundrum: when a strategy outperforms and more investors pile in, it can get more expensive and therefore be less likely to outperform going forward. This is discussed as it relates specifically to factor investing in a recent Morningstar article. Alex Bryan, CFA, director of passive strategies research (North America) for Morningstar, poses the question: “What if the apparent performance edge is not sustainable and investors are just relapsing into counterproductive performance-chasing?” He offers support for related research results published by Rob Arnott and his colleagues at Research Affiliates. Arnott, says Bryan, “argues that valuations matter, and […]

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 […]

Time to Bottom Feed Across the Pond

The U.S. stock market is expensive and bond yields aren’t far from record lows. European and emerging market stocks, on the other hand, have approached stomach-turning status, says Jason Zweig of the Wall Street Journal. The European market has dropped by 12% while emerging markets have plummeted by 21.8%. Stabilized oil prices and a possible interest rate hike by the Fed has lifted investors’ outlook on these markets by a marginal 2% to 3%, but the fact remains that overseas stocks are cheap. In fact, according to data from MSCI, as of April 30th the average price-to-book value of European […]

Doll on the Markets Positives and Negatives on Today’s Market

In a recent Barron’s article, Nuveen Asset Management’s Chief Equity Strategist Bob Doll says that, despite disappointing first quarter results and apparent earnings struggles, consumer spending will be a healthy tailwind for the economy as a whole. He offers contrasting views of the current market situation:   Positive: Equity valuations don’t appear to be stretched; Earnings improvements should materialize in the coming quarters; The tumult in the oil market appears to be over; Investor sentiment may be overly bearish; Corporate tax reform prospects for next year appear strong.   Negative: Improvements in the earnings outlook are probably necessary for equity […]

Larry Swedroe on Emerging Markets, Recency Bias, and When to Buy

Director of Research for the independent investment advisor community BAM Alliance, Larry Swedroe, offers his take on the current underperformance of emerging markets versus U.S. stocks, the importance of recognizing recency bias, and the sensibility of buying low and staying globally diversified over the long-term. He notes that from 2008-15, the S&P 500 returned 6.5% annually for a total return of 66%, while the MSCI Emerging Markets Index lost 2.8% per year for a total return of negative 21% and also experienced significantly more volatility. Other measures show a similar comparison over the early months of 2016 or over a […]

Paulsen: Look Deeper at Valuations

Nearly six years into the bull market, the S&P 500 is trading at somewhat elevated but far from euphoric valuations. But in a recent note, Wells Capital’s James Paulsen says that doesn’t tell the whole story of the overall market’s valuation.