You’re probably exhausted of hearing the words ‘interest rate hikes’, ‘Greece’, and ‘crude oil prices’ over the past few months. Fear not, we’re all pretty much in the same boat. Unfortunately, with all 3 subjects in the hands of policymakers, the outcomes can be influenced only to an extent by free markets (sure, oil prices remain low due to the excess of supply over demand, but it’s something Saudi Arabia could influence very quickly if it decided to deviate from the waiting game with US shale players). So, let’s look into some less-covered financial facts that are worth another glance, and at the end, discuss what they mean for you as we enter February’s last trading week:
1. Fundstrat’s Thomas Lee recently pointed out that the percentage of US accumulated depreciation to gross plant assets is now over 50% in the S&P 500, for the first time in history.
Whether capital expenditure will increase this year is one of the two compelling questions we’re watching for in 2015. Such statistics further our belief that it’ll happen sooner than later – companies can’t just keep depreciating their assets forever. So it’s a question of ‘when’, rather than ‘if’, they’ll start spending. And ‘when’, in our opinion, is contingent on whether a potential global economic slowdown later this year deters US corporations from spending their cash. We remain optimistic that they will.
2. With January’s employment report, the US is now down to a 5.7% unemployment rate – ‘among the lowest in the club of [rich] OECD nations’, as stated by The Economist. In fact, the publication goes on to state ‘at last, a proper recovery’ for the United States, where ‘all sorts of Americans are feeling more prosperous’.
The last sentence above is key, with the average weekly earnings in January showing the biggest increase since mid-2011. More people are finding employment, and therefore, can spend more, along with increasing wages. Also, remember that they’ve got approximately $750 more in savings for 2015 due to lower gas prices, per the US Energy Department. We’re pretty happy with the US economy’s progress and growing discretionary spending potential, especially considering the bleak international outlook. It remains a safe, competitive, and growing economy where we believe the investment reward is well worth the risk in the long term.
3. The number of private equity funds is at an all time high, according to Palico, an online private equity marketplace (highlighted by CNBC). And according to the WSJ, there are now at least 73 private tech companies valued at more than $1 billion, compared to 41 a year ago. It also highlights that 2014 was the most lucrative year for venture capital since 2000.
Our belief of it being a yield-parched world is further solidified by these three facts above. Keep in mind that markets are trading at moderately expensive levels, a Greek exit (we agree, it’s more fun to call it Grexit) remains a risk to unraveling the Eurozone, and global bond yields are at ridiculously low levels. Meanwhile, a possible capital flight later this year due to US rate increases is not really enticing investors to rush into emerging markets (for example, the EEM tracker has underperformed the S&P 500 by over 10% in the past year). Therefore, to earn some return, investors are scouring all sorts of alternative routes to put their cash to work. This includes private equity, venture capital, shareholder activism, and other uncommon methods that most retail investors can’t access easily. So, be careful with making risky single stock trades – the smart money may be hinting that there’s no value left there, and therefore has moved on to other alternatives as shown by the 3 points above.
4. US corporate bond sales hit an all time high in 2014, at more than $1.5 trillion, according to FactSet. Meanwhile, this January, Apple conducted a $6.5 billion bond sale to lock in low interest rates. And, we highlight that the utilities sector is the worst performer in the S&P 500 so far this year.
The utilities sector is commonly used as a proxy for bonds due to the stable dividends and company risk profiles. The 3 points above show that companies and investors are preparing for a US interest rate hike later this year. We’ll be watching the Fed’s meeting minutes next week for hints on whether this happens. Inflation is not yet at the Fed’s target levels, and with a chaotic global geopolitical scene, it may just hold back. But at the moment, the markets – and we – are factoring in a rate increase in our decisions.
What it means for you: Per our previous article, if you can’t influence a policy maker, all you can do is adapt. Invest most of your hard earned money passively with ETFs such as SPY and VXUS and ignore the daily news noise – you’ll be fine in the long term. Still, it’s important to know what can impact your money. In the meantime, if you want to invest actively, note that 43% of active large-cap fund managers outperformed the Russell 1000 index in January per CNBC – way higher than the meager 20-odd% in all of 2014. So, take solace in knowing that the volatile markets so far – and likely ahead in 2015 – may be providing more short-term opportunities for smart investors to capitalize on. Companies benefiting from capital expenditure, consumer discretionary spending, and the US market as a whole should provide decent, stable returns in the next 2-3 years. Meanwhile, in the short term, choose single stocks extremely carefully, base your decisions on their products, management team and vision, and remember that high-dividend stocks might suffer significantly when interest rates do go up. For more ideas, check out our columns below, and keep an eye on the risks as you move ahead with the markets.
