Mike spent a whole day in Federated Tower on the 24th meeting with 9 of Federated Investor’s portfolio managers to get a pulse on the markets and how or if that’s effecting their strategies.
Federated is a great company for this type of info because they get their best and brightest minds together to make big picture or macro opinions on the market. These opinions are then disseminated to their portfolio managers as framework for their bottoms up research.
First, the outlook on stocks.
Opinions on US stocks in general are positive. The growth managers at Kaufmann are of the opinion that this bull market is only 5 years old based on historical data and could have a lot of room to run. They cite the way technology infrastructure is changing business as a second industrial revolution and that the U.S. is in an excellent position since all the technology making this revolution possible has been invented here.
Also, the U.S. has better demographics than most of the world which should give us a growing workforce for years longer than other developed and emerging countries like Japan and China.
Why else are they positive?
- Tax reform really is helping companies get their act together, generating free cash flow to lessen the need for complex and potentially risky growth strategies.
- A transparent FED is helping build interest rate moves into the market to avoid shocks and could actually set up for positive surprises next year if they don’t raise rates as much as they say.
- There is no economic indication that inflation will get out of hand any time soon and force the FED to put out the fire by overtightening.
The bond outlook isn’t terrible, but I wouldn’t call it exciting either.
Now that interest rates are actually moving, this is putting some real pressure on bond prices. Higher quality bonds like treasuries are down right now and could continue to be while interest rates rise. Other types of bonds aren’t necessarily losing money, but don’t expect banner years for them during rising rates either. Basically, right now it would be wise to look at bonds as diversification from stocks, not necessarily a huge money maker. They’re still going to pay their coupons as long as they don’t default, but many funds could see some price decline during this time. These potential sluggish returns may be frustrating for a bit, but it’s important not to completely abandon bonds in the event that something does cause a stock market drop.
Another popular topic that came up was that of the yield curve flattening and potentially inverting.
The stock gurus had a nonchalant attitude toward the subject. Their solace came from the fact that average equity returns from this point on the curve to when it has flattened have historically taken 18-20 months and involved equity returns around to 90%
Additionally, even after an inversion it has historically been another year or two until it caught up with the economy and caused a recession. So basically, even if it does invert, there could be some great stock pickings left to be had until a slowdown.
The bond folks don’t think it’s a huge issue either, but it does cause some credit issues that could slow down growth and cause recessionary conditions.
There was certainly no sense of urgent concern on the subject though, and both were relatively happy with the direction of the economy.
The main thing I got from this is that diversification is key now more than ever. We’re hitting a point where we’re really starting to see some differences in how investments are performing and expect this to continue. Some could continue to do well and others could struggle for years in the current environment. Understanding what we own and why will be key to getting through whatever the future may bring.