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80% of companies that have reported earnings have beat profit estimates, and 69% have beat sales estimates, writes BlackRock’s Russ Koesterich. Yet risky assets like U.S. stocks and high yield bonds have seen some selling. “This seems to be a sign of investor fatigue setting in,” he writes. Investors pulled $US4.2 billion from global exchange traded products, with U.S. large caps losing $US6.8 billion. Meanwhile, $US4 billion has exited high yield mutual funds and exchange traded funds (ETFs). Koesterich thinks the selling in high yield is “more surprising.”
“High yield is often thought of as the most “equity-like” segment of the bond market. Good news on the earnings front and a strengthening economy usually translate into support for high yield bonds. In addition, default rates on high yield bonds are low.” He argues that this is surprising consider the interest rate environment has been “remarkably stable” and that inflation has been low.
74% of advisors think they need to justify their fees to clients, according to a new quarterly survey of 150 advisors from Russell Investments. 65% want more resources to help them communicate more realistic return expectations to clients, writes Kathy Lynch at FA Mag. “Advisors surveyed said that the top two client-initiated conversations were about market volatility (54 per cent) and their concerns about government policy (53 per cent),” writes Lynch summarizing its findings. “Those were followed by global events (35 per cent) and their fear about running out of money in retirement (34 per cent).”
‘Diversification Works When You Need It To’ (Business Insider)
“One of the unsung benefits of a diversified portfolio is a quicker recovery after a major negative market event,” Joshua Brown and Michael Batnick at Ritholtz Wealth Management told Business Insider. “Below is the S&P 500 since January 1st 2007 against our ‘Diversified Portfolio,’ which includes the S&P 500, plus a 30% allocation to foreign stocks (EAFE index) and a 40% fixed income weighting (via the Barclays Aggregate Bond index). As you can see, the diversified portfolio regained its peak value 14 months before a portfolio consisting of just US stocks would have. Volatility was substantially lower, as was the maximum drawdown. Diversification works, especially when you really need it to.”
5 Strategies To Consider For A Rising Rate Environment (Franklin Templeton)
When it comes to interest rates, it’s a question of when they will rise, not if, write the folks at Franklin Templeton. They suggest five strategist to consider for a rising rate environment.
1. “Consider credit-oriented sectors — Non-investment grade credit sectors, such as high yield corporate bonds and bank loans generally have been less correlated to interest rates than they have been to the overall economic outlook and corporate earnings.”
2. “Keep it short — Short-duration bonds typically have lower sensitivity to interest rate changes than their longer-duration cousins.”
3. “Go global — A global or internationally focused fixed income fund can potentially capitalise on differing business cycles and economic conditions around the world and may therefore be less impacted by rate changes in the U.S.”
4. “Take stock — Hybrid strategies (funds that invest in both stocks and bonds) can capitalise on both the growth potential of equities when rates are rising due to economic growth and the income offered by bonds.”
5. “Stay flexible — Multi-sector fixed income funds have the flexibility to invest across various sectors of the fixed income market, and fund managers typically shift the fund’s allocation over time to take advantage of different investment opportunities.”
Byron Wien Makes The Case For Another Huge Rally In Stocks (Business Insider)
In his latest market commentary, Byron Wein explains why he thinks the S&P 500 could rise to 2300. “One of the problems limiting investor enthusiasm may be valuation,” he writes. “If the S&P 500 earns $US115 in 2014, it is selling at 17.1x earnings. Market peaks have occurred historically at 25x — 30x times earnings. On that basis, the market is fairly valued but not exceedingly expensive.”
“The average trailing 12-month price-earnings ratio when the inflation rate is 0% — 4% is 17… If the economy grows at a rate of 3% real during the remainder of the year and inflation is 2%, then nominal growth should be 5%. With productivity increases continuing and share buybacks, the S&P 500 should be able to show improvement of 7% over the $US108 in operating earnings of 2013 and that would put us at $US115. With considerable cash on corporate balance sheets, share buybacks should continue. Therefore, if earnings reach my target and the S&P 500 sells at 20x, we could reach 2300, which is 17% above the present level or more than 20% above the index price at the start of 2014.”
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