I am making my wish list early this year; and request that Santa make an early appearance.
MY SANTA WISH LIST:
- Janet Yellen raises interest rates, slowly–but gets started ASAP.
- Make Jim Cramer’s FANG stocks be nice and share market gains with their friends and neighbors—but may their gains continue.
- Upgrade my tickets to Phoenix for the National Championship to first class.
While most of my wishes are client-portfolio-centric, I did indulgently throw in the personal first class upgrade request. I’ve been good this year, right?
Wish #1: Raise Interest Rates
Please, Santa bring us all an early present next week and end the rate hike story of “will-they-won’t-they.” Please talk to Janet Yellen and tell her you’ll be extra nice to her this year if she pulls off the bandaid and gets on with a much needed rate hike (but tell her to be gentle, too).
CNBC’s Larry Kudlow offers an informative and concise deep dive on the state of the economic-political union that will result in your Christmas list getting longer and longer; Santa, add lower corporate tax rates (Okay, we can scratch the first class upgrade, DEAL) to my list above.
Ms. Yellen, it’s time–Let’s wrap it up, put a bow on it and be done with the rate hike story—seriously. If there is one thing markets don’t like it’s uncertainty. The uncertainty of WHEN rates will rise has increased volatility, with no returns on the other end of the stick—bad combo. The Fed has kicked this can down the road long enough and most, if not all, economic indicators point to a strong enough economy to withstand what will still be an almost zero federal funds rate.
What do investors need to do ahead of next week’s rate hike? Quiet the Noise. If you’re a DIY investor, I suggest one thing; minimize long-bond, high duration exposure. No rocket science here, but if you’re invested in ETF’s you’ll need to look under the hood of your holdings and understand just what each ETF owns. On the stock side, sure you could try and time your holdings to minimize stocks or ETF’s that historically perform poorly in a rising rate environment (utilities, consumer staples to name a few), but timer beware. The data is ambiguous at best and if you simply stay the course with sector rotation and high quality names, you’ll find that a rising rate environment might not hurt as bad as you think.
“Rising Rates Shouldn’t End This Bull Market” says Bob Doll, Chief Investment Strategist at Nuveen Asset Management. “Many investors,” Doll wrote, “believe that when rates rise, the party is over for stock prices. Historically, however, this has not been the case.”
Historical data from the past six rate-tightening cycles yields two of the six rate hike cycles with stocks lower a year after the initial rate hike. The average gain for the S&P 500 in all six cycles was 2.6%, and two years after hike No. 1 the market was 14.4% higher, Doll’s data will show.
Bottom line: Investment managers who espouse to know what to sell ahead of a rate hike in this turbulent market, short of, again, long maturity, long duration bond adjustments are simply playing a game of roulette. Quiet the noise, wait for the hike and make sure you’re in high quality names…great segue to next on my wish list:
Wish #2: May FANG’s prosperity continue, and make them share.
Please Santa may FANG (Facebook, Amazon, Netflix, Google) continue their lopsided run of the markets, and share market gains with the other 85+ quality names worthy of stock market glory, before Christmas, PLEASE. FANG has enjoyed a great growth run and accounts for approximately 40% of the S&P 500’s returns YTD. Yes, that’s right—so if the S&P is flat YTD, then that leaves most other stocks in negative territory for the year. Herein lies why a quality portfolio may be underwater YTD.
For example, we don’t own a large amount of Netflix, why? Anyone remember the 800,000 loss in subscribers sometime back and the more recent diminishing net income and free cash flow issues? There are a few reasons. And while we own it through QQEW, we won’t take stock risk with this FANG member anytime soon. So, Santa, can you tell the FANG Gang to share with some of the quality S&P 500 and NASDAQ folks before year-end?
Bottom line with FANG: you gotta own ’em—just be ready for the switch from high-growth to high-value…coming to a portfolio location near you soon.
Wish #3: First class upgrade.
Finally, Santa will you please upgrade my plane tickets to Phoenix for the National Championship to first class? It’s not a “sable under the tree” just a small upgrade. I’d ask for you to make my Alma Mater, the Clemson Tigers the National champs, but that’s not possible before Christmas since the game isn’t until January. So upgrade me, and we’ll have to let Dabo and the big guy do the rest (Ok, Deshuan Watson, @Shaunwatson4 , you might can help out a bit, too).
As for the partridge in the pear tree—I bet his bird’s eye view of the market and how 2015 will wrap up is about as clear a the National Championship outcome: it’s anyone’s game. Given that, stay loyal to your team: rules based investment management with high quality names and a good track record.
Stay tuned for the 12 days of Christmas…until then (as we do in Santa—and Markets)—just believe.