The following chart shows expectations for interest rates set by the fed have changed dramatically over the last year from expected increases to expected decreases. And the big question to many investors is Why? With an economy that appears quite healthy (healthy GDP growth, low unemployment, inflation in check), why wouldn’t the fed be raising interest rates to a more normal level? Afterall, they’ve been abnormally low by most standards since the financial crisis.
Is the fed bowing to the Twitter in Chief who wants lower rates to spur the economy heading into an election year? Or does the fed simply want to punish savers by keeping rates artificially low? There are certainly plenty of retirees out there that long for the +15% yield on treasuries that existed in the early 1980s. That’d make retirement life a little easier, now wouldn’t it.
One could make the argument that on a relative basis, why should the US have higher interest rates (the cost for businesses to borrow money so they can grow) compared to other international economies, because it puts the US at a relative disadvantage. And given the ever increasing connectedness of the global economy this argument may have some increasing merit (it’s also a similar argument that’s made for placing tariffs on Chinese goods considering that country’s monetary policies disadvantage the US, and they absolutely do it intentionally). Nonetheless, the US economy remains healthy for now, and the merits of a rate cut at this juncture seem imprudent to many:
The Fed and markets seem dead-set on it, but it’s not clear it’s necessary. By Mark Gongloff (July 19, 2019, 3:32).
Fed Officials Signal Quarter-Point Rate Cut Likely at July Meeting (Central bank’s move viewed as insurance against sharper slowdown).
One of the goals of low interest rates is to deter savers (people who put money in savings accounts and low interest bearing bank accounts) to invest in riskier investments that offer higher long-term returns, albeit with significantly higher volatility risk, such as the stock market. For example, here is a list of stocks that have put up some impressive returns in the last half century, although cherry-picked hindsight tends to always be 20/20.
Value Versus Growth:
Interestingly, the stocks in the graphic above are not the high grow tech companies that have dominated the market over the last 10 years since the financial crises.
According to a recent post by Jack Vogel at Alpha Architect:
“As many investors have experienced, Value investing has underperformed for some time now. For the period following the Global Financial Crisis, Value investing (in general) has underperformed (1) the market and (2) Growth stocks.
So while the past decade has been rough for Value investors, it can be a good time to examine the process and importantly determine how one forms their Value portfolio, with the hope that the next decade will be better for Value stocks.”
Further still, the often-brilliant folks at Research Affiliates (Rob Arnott Bradford Cornell Shane Shepherd) recently shared some interest observations on bubbles in terms of growth versus value, noting that:
“Today, Tesla, bitcoin, and certain US technology stocks are valued far above their fundamentals and are well into bubble territory. These assets are well avoided by investors, as are US market cap–weighted indices, which have an historically large concentration of pricey and overvalued large-cap tech stocks.
Investors who take advantage of today’s anti-bubbles have the opportunity to add value by investing in the emerging markets, particularly state-owned enterprises (SOEs), and by averaging into the UK stock market where stocks are feeling the pressure of Brexit-related uncertainty.
Value-oriented smart beta strategies in both the developed and emerging markets offer investors promising investing opportunities outside the many bubbles in today’s global markets.”
However, just because something falls into bubble territory, doesn’t mean that bubble cannot get bigger, perhaps much bigger and over a significantly longer period of time, especially considering the Fed’s recent about face of interest rates.
How To Manage Your Own Investments
So what’s an investor to do? Popular blogger and successful businessman, The Reformed Broker, recently revealed some details on his own personal investment holdings, which include:
“Very simply put, I’m a mixture of active and passive, a mixture of mutual funds, individual securities and ETFs, a mixture of public and private assets. What is consistent is that almost everything I do is with a long-term bias. I don’t day trade or swing trade, because I’m bad at it and I feel as though those activities are a full-time commitment.”
He goes on to note that at Ritholtz Wealth Management:
“We eat our own cooking with our own personal retirement accounts. I consider the combination of my 401(k) invested in our client strategies along with my equity stake in the firm to be my “real money.” I’ve made the bet of a lifetime on our advice and our business.”
Josh is obviously a very successful businessman, but take his advice with a grain of salt because there are clearly some conflicts of interest in his advice that suggest he may still be working on the “Reformed” part of his “ReformedBroker” Twitter handle. Specifically, he likely knows mutual funds fairly consistently underperform ETFs and other long-term strategies with much lower fees (and often with zero fees--there are no management fees when you build your own long-term stock portfolio). But he has to own expensive mutual funds anyway so he doesn’t look like a hypocrite relative to the client accounts his firm manages which likely have had these expensive overvalued investments in client accounts for a very long-time and thereby making them challenging to tactfully dump at this time. And from a personal cost-benefit standpoint for Josh—why not throw away some mutual fund management fees in his personal account when he more than makes it up many times over in the fees he generates owning these out-of-date inappropriately-expensive strategies in his clients’ accounts. It’s not dumb luck that has made Josh the successful businessman that he is.
As a reminder, prudently-diversified, objective-oriented, long-term investing has proven to be a winning strategy over and over again throughout history. And if you are so inclined, it does NOT involve paying exorbitantly high management fees and trading costs to conflict-of-interest-ridden investment advisors who are far more interested in lining their own pockets with cash than they are interested in helping you. And if you need another current reminder, here is another example:
Wells Fargo’s Wealth Management Unit Attracts Justice Department Attention (Whistleblowers accuse the bank of pushing products that may not have been the best fit for the customer).
How We Are Invested (Current Holdings and Performance)
For starters, here is a look at our current holdings, and the performance of each position over recent time periods.
A few things worth noting…
IBM announced better than expected earnings last week and the shares traded higher, as you can see in our holdings chart above. IBM is one of those perennial value stocks that has been underperforming high growth stocks in recent years. However, with a very healthy 5% dividend yield, IBM continues to be attractive for income-focused contrarian investors in particular.
Netflix, a name we own in our “Income Via Growth” portfolio sold off hard over the last week. In particular, subscriber growth came in lower than expected, and that didn’t sit well with investors already upset about the content providers loss of key shows (e.g. Friends and The Office). Nonetheless, there was a little bit of a time issue on the subscriber growth issue, and we expect the company to make up some of the losses next quarter. Further, Netflix continues to grow its business rapidly, regardless.
Shopify had another big week. We shared an article in last week’s Weekly about this “Amazon killer,” and SHOP has a ton more room for growth.
Facebook had another interesting week as investors and regulators consider the risks and strengths of its planned new cryptocurrency, Libra:
Simon Property Group (SPG): Our A-Class Mall REIT remains an attractively price big-dividend value stock. And here’s a link to an article suggesting the “smart money” continues to see attractive opportunity in A-Class malls.
CBRE Global Investors Buys Stake in Three GGP Malls: (Toronto-based Brookfield also is closing on a $15 billion deal to buy the 66% stake in GGP that it didn’t already own). One of the world’s largest real-estate asset managers has purchased a 49% stake in three malls in a deal that values them at more than $1 billion and shows that investors still have an appetite for top-tier retail property.
Upcoming Earnings: Keep it on your radar, AT&T, Facebook, ServiceNow and EastGroup Properties (all portfolio holdings) are all expected to announce earnings in 5 days.
Alternative Fixed Income Strategy
Our low best AIF strategy just keeps chugging along and paying big income. This strategy won’t experience the same big long-term price appreciation (or potential near-term price declines) as our other strategies, but it will keep paying low volatility big income payments to investors. And considering the fed is about to cut already artificially low interest rates again—that’s really saying something!