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"Investing in short-term treasuries is like picking up pennies in front of a steamroller." -- Unknown
We are in a period of low returns, and, we hear you, it is frustrating. Unfortunately, we may be here for a while. The U.S. stock market has been valued on the higher side, and the fear of rising interest rates continues to have an impact on fixed income markets. The biggest paradox in this market is that safe investments have struggled the most.
Yesterday, we saw the Dow scream upward +241.79. At the start of today (8/11/15), markets are whipsawing in the other direction. It appears the market is under some early-morning pressure in the wake of a surprise announcement from the People's Bank of China that it will devalue its currency. The news sparked the largest decline in the yuan in over twenty years. China is our largest trading partner and it represents 40% of our emerging market trade, which is now more than half of all U.S. trade. For this reason, economic news out of China is critical to economic and market developments here in the U.S
The first two quarters of 2015 have generated lackluster results, and it has been a difficult environment on many fronts. Because of the zero interest rate policy set by the Federal Reserve, safe haven investments like cash and treasuries are returning next to nothing. Internationally, Greece has created major turmoil. And, on the emerging market fronts, China has had a major market correction, and now it's signaling a devaluing of its currency.
As of June 30, 2015, domestically, the Dow, which was in and out of positive territory for the first six months of the year, is down -1.1%; while some domestic indexes were up (for example, small caps measured by the Russell 2000 index is up 4.1%), many domestic indexes are down:
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NY Stock Exchange Composite
| -0.3% | |
AMEX Major Market Index
| -3.1% | |
The Dow Jones Utility Average
| -11.0% | |
The Dow Jones Transportation Average
| -11.5% |
While a low interest rates and low inflation environment will lead to higher valuations in stocks, the valuations are arguably richly valued. On top of that, interest rates may be going up soon (based on recent comments by Federal Reserve officials as a guide). In the short run, that may lead to continued volatility.
The fixed income markets has been equally challenging. 6-month treasuries are yielding next to nothing (0.08%). In the short run, an interest rate increase will hurt the market value of any fixed income investments, the longer the maturity, the bigger the impact.
The good news, the economy is slowly getting better; inflation remains low; and corporate profits may still be sufficient to largely sustain this bull market. Still, we are bracing for a period of low returns. We are not recommending any changes at this point. We are anticipating making changes in our fixed income strategy when the Fed starts to normalize interest rates.
We're past the halfway point for the year: both a lot and very little has transpired. Anxiety over rising interest rates, currencies, Greece, China, geo-political upheaval, etc., the stock market is always moving, but unfortunately, it's not going anywhere. Based on data available to us today, we are anticipating a period of low returns.
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