We feel turmoil in Greece and a potential exit from the Euro will not change the outlook for most U.S. companies. However, the uncertainty is making investors cautious.
Until this Greece crisis, their primary nervousness has been (and is now) upcoming interest rate increases from the Federal Reserve and their impact on the economy. The Fed has kept short-term rates at historical lows of 0% since late 2008 and has not increased rates in nine years. With the U.S. economy finally showing signs that it is strong enough to stand on its own – six years after its low point during the 2008-2009 financial crisis resulting in the Great Recession – the Fed is now getting ready to start normalizing rates. Its Chair, Janet Yellen, has hinted that the central bank will be deliberate in moving rates back up.
Wall Street is worried that stocks will fall when the Fed raises rates. History, however, shows otherwise.
An analysis of how stocks have actually performed during the past five “rate-hiking” cycles dating back to 1987, indicates that higher rates are not necessarily a negative for stocks. The analysts feel that stocks clearly are choppy in the six months ahead of the first rate increase in each cycle. The S&P 500 actually did reasonably well during the full rate–tightening cycle, achieving average gains of 16.1%.
Bonds, whose prices move inversely to interest rates, have been weak of late, as interest rates have risen. The 10-year U.S. Treasury Note yield increased to 2.5% on June 26th, nearly a full percentage point above its January 30, 2015 low of 1.65%, hitting its highest level since September 2014 (it is currently yielding 2.3%). We have been anticipating higher rates by investing in bonds and bond funds with short and intermediate term maturities (7 years or less). Their prices are not as sensitive to interest rate changes. While prices of longer term bonds have declined 5-10% since 12/31/11, our bond approach has generally resulted in stable returns.
Our short-term outlook is for continued stock market volatility in large part because of the threat of Greece’s exit from the eurozone. It is also based upon the fact that U.S. stocks are now trading somewhat above their long-term price-to-earnings ratio of 16. The current 18 P/E of the S&P 500 suggests stocks are a little pricey, but relative to historical norms, is not excessively high.
We feel that if a correction (defined by a 10% stock market decline) develops, our actively managed portfolios are generally adequately diversified among 7 – 9 industry sectors and will serve to provide principal stability. We are currently more heavily invested in the financials, healthcare, and technology sectors which typically do well in this stage of the economic cycle. Our stock selection includes well managed businesses with significant competitive advantages and strong long-term growth potential. We favor stocks with attractive and growing yields, and are likely to buoy a portfolio when times are tough.
Our mutual fund approach continues to also stress diversification among stock funds investing in various size companies with varying investment styles. We also like certain sector funds which specialize in healthcare and technology companies. Where suitable, we have exposure to foreign stocks which we feel are currently cheaper than U.S. stocks and have perked up this year.
Looking ahead for clients holding bonds, we are adhering to our philosophy that their role should be to provide stability for the overall portfolio and reliable income (in that order). This strategy will be especially important as the Fed begins its slow tightening. Short-to-intermediate term bonds and bond funds, as mentioned, should continue to fulfill their role more effectively than longer-term bonds.
We will keep you informed as 2015 progresses.
This material is provided for informational purposes by Hall Capital Management Company. The material is not investment advice and is not a recommendation, an offer, or a solicitation of an offer, to buy or sell any security, strategy, or investment product. The views and opinions expressed in the material solely reflect the judgement of the authors, but not necessarily those of the company or any affiliates as of the date provided and are subject to change at any time. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but the company does not guarantee its accuracy. The information presented should not be regarded as a complete analysis of the subjects discussed. Any past results provided do not predict or indicate future performance, which may be negative.
Additional information, including management fees and expenses, is provided on Hall Capital’s Form ADV Part 2. Past performance is not a guarantee of future results.