The Search For Yield Is On Again

As we progress through 2019, one of the predominant themes has been the dramatic reduction in interest rates across the globe.  While interest rate cuts are meant as an elixir to struggling economies, it also has the effect of lowering rates of return for bonds and other safe assets.  As a result, many investors are left with questions on how to generate income in their portfolios while staying within their personal risk profile. 

In the US, interest rates have been declining precipitously.  Per the chart below, US 10-year treasury rates have decreased from a recent high of 3.22% on November 2, 2018 to 1.55% on August 16, 2019. 

Further, August 14, 2019 saw the 30-year US treasury hit an all-time low yield of 2.06%, per

When US rates are declining aggressively, it makes existing bonds more valuable (as they are paying higher than current market rates) but creates lower return for new bond investors (or those that are reinvesting proceeds from matured bonds).  A perfectly suitable alternative, historically, was to look to international bond markets for potentially greater yield.  At this time, however, many international markets are paying NEGATIVE YIELDS, which means that you will receive less money at maturity than you are investing today.  The chart below, from JP Morgan, shows the current yields for government bonds for several different countries. The bonds highlighted in red currently have negative yields:  

A logical question is why anyone would invest in a negative yielding bond.  The answer is that speculators buy these bonds as they expect rates to go lower, thus making their negative yielding bond more valuable in the short term.  In our opinion, this is a dangerous game that does not seem sustainable over the long term.  So, for investors looking for additional income in a low/negative yield world, here are some of our suggestions for alternatives:

  • Dividend paying stocks: Our G50 and G40i portfolios are currently generating above 3% per year in dividend income.  Further, the companies we invest in are healthy companies with long term track records of paying, and increasing, their dividends.  This dividend increase is a powerful force to offset the effects of inflation and provide a greater amount of income over time.
  • Alternative income assets: Alternative assets that lie outside traditional stocks and bonds are investments such as REITs, preferred stocks, and senior bank loans.  These assets are generally higher risk than traditional bonds but offer a higher recurring income source.  Our Absolute Yield portfolio is a terrific example of a diversified asset allocation strategy that invests in high income assets and is currently yielding over 5%.

Overall, if investors want additional income in the current market, they will have to accept higher risks.  We would not expect a lot of return from traditional bonds at current levels, but they still have a place in client portfolios as a means of risk reduction.  US treasury and US corporate bonds, despite the recent collapse in interest rates, still provide positive relative income and can offset volatility from riskier investments. 

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on August 21, 2019 Read More

Onward and Upward

The third quarter began in bullish fashion as the most of the major stock benchmarks jumped by 1.5% or more in the first week of July.  A key catalyst for this quick start was the Department of Labor’s June jobs report that said the U.S. economy added 224,000 net new jobs, 60,000 more jobs than most forecasts predicted.  The headline jobless rated moved 0.1% higher to 3.7% in June, but the employment numbers remain strong across the board and are keeping consumers in good shape. 

Retail sales reported in July for June’s activity were up 0.4%, which exceeded expectations.  This is meaningful as consumer purchases represent two-thirds of our Gross Domestic Product (GDP).  The second quarter delivered 2.1% GDP growth, slightly above the 2.0% expectation.  While this is weakest print in over two years, the decline was mainly a result of a decrease in business investment.  Consumer spending increased 4.3% and government spending jumped 5.0%.

On the last trading day of the month the stock market gave back some of the first week’s strong gains.  Through previous statements and testimony, the Federal Reserve chairman had opened the door to future interest rate cuts.  The economic sluggishness elsewhere around the globe has caused the Fed to rethink their current fed funds rate target.  In the final trading hours of July, the Federal Reserve announced their first interest rate cut in over ten years.  The 25 basis point cut along with post decision comments by Chairman Powell disappointed market expectations causing a one day stock price correction. Now all eyes turn to the employment numbers to be released on August 2nd.

The recipe for this strong economy includes more people employed, consumers willing and able to spend, and corporations’ ability to earn money and grow profits.  July 15th marked the beginning of another round of quarterly corporate earnings announcements.  More will be known by mid-August, but the early news looks positive on the corporate earnings front as 77% of those reporting have exceeded expectations.  As is the case each quarter, there are individual companies that exceed expectations and those that fall short.  On the positive side, money center banks had a good quarter, some technology companies like Alphabet, Intel and Twitter exceeded forecasts while Amazon, Caterpillar and some of the smaller airlines disappointed.  Consumer favorites like McDonalds, Costco, Starbucks and Coca-Cola found their way to new 52-week high stock prices on very strong quarterly results.

While background noise can be distracting, it is important to identify and understand the signal in the headlines.  Tariffs are likely here to stay for the foreseeable future, yet the markets continue to react to the latest threats and realities.  Tariffs on Mexican imports appear to be off the table for now.  After the June G20 meeting, China is back to the negotiating table, but they seem content to be very deliberate with their discussions and may wait it out until the next election cycle.  France may be the next tariff target as they plan to institute a new digital tax on certain U.S. technology firms.

Be aware of your total surroundings but remain keenly focused on the U.S. consumer and corporate profits as those tend to be better indicators of long-term economic health.

U.S. stocks have once again found their way to higher highs.  The S&P 500 cracked the 3,000 level and the Dow Jones Industrial saw 27,000 for the first time this month.  The strong economy, low interest rates, benign inflation, corporate earnings growth and an accommodative Fed have set the stage for this remarkable run in the financial markets.  The Dow Jones Industrial Average, NASDAQ Composite, S&P 500 and the gained 1.12%, 2.15%, and 1.44% respectively in July.  International stocks continued to lag the U.S. as the MSCI EFAE and emerging markets indices declined -1.27% and -1.22% respectively.  

Bond performance is exceeding all expectations at this point in the year and looks likely to hold from here.  Low inflation and continued moderate growth should keep interest rates in a tight trading range.  This month interest rates ticked up slightly after a strong rally into mid-year. The 2-Year Treasury note yield rose 14 basis points to end July yielding 1.89%.  With the fed funds rate now pegged at 2.25%, it’s obvious the market is still calling for another future Fed rate cut.  Yields also increased marginally on both 10-year and 30-Year Treasury securities bringing their yield to 2.02% and 2.53% respectively.  

We would encourage investors and advisers alike to concentrate on asset allocation and portfolio rebalancing and less on absolute market levels and emotions.  Yes, it is true the U.S. stock markets are trading near all-time highs and interest rates remain stubbornly low.   This statement was true a year ago and may still be true a year from now, we just don’t know.  Instead of falling victim to the next bearish viewpoint you read or hear, take this opportunity to rebalance your portfolio back to your targeted risk tolerance.  For example, if three years ago it was determined that 60% stocks and 40% bonds was the asset allocation best suited for your situation and asset appreciation now has your portfolio at 66% stocks and 34% bonds – it’s time to rebalance.  Use this strong market as an opportunity to reduce stocks by 6% and add 6% to bonds, thus returning your portfolio to the original 60/40 allocation target. 

Also, it is important to avoid the temptation to “go to cash” when you read the next well-written “end of the world” piece.  Investing is a marathon, not a sprint.  Enjoy the run, breathe, and stay invested at a risk tolerance appropriate for your situation.    


To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on August 12, 2019 Read More

PMI and Flash PMI Indicators

Economists often look to an indicator called the Purchasing Managers’ Index (PMI) as a directional indicator of the economy. The indicator is an indexed summary of surveys completed by corporate purchasing managers as to how they feel about metrics such as new orders, factory output, employment, inventories, delivery times, etc. They usually give answers that imply improving, no change or decline from the previous survey.

PMI’s are published on a monthly basis for most countries and regions around the globe by two primary sources:

  • The Institute for Supply Management (ISM)
  • The IHS Markit LTD

PMI’s are also broken into two broad sectors

  • A manufacturing sector PMI
  • A services sector PMI

In general an index reading above 50.0 suggests expansion and a reading below 50.0 indicates contraction. Both economists and investors closely monitor monthly PMI data to analyze economic health and trends in the surveyed region. In fact, many investors use PMI surveys as a leading indicator of the state of consumer demand and GDP. Below are the US IHS Markit Manufacturing and Services PMI as of June 2019:

We can see that while both the manufacturing and services sector PMI’s are still above 50.0 (expansion), they’ve declined substantially in recent months. It appears optimism is being weighed down by persistent uncertainty surrounding tariffs, global trade conditions, tight labor markets and higher input costs. This has investors concerned that the US economy is slowing down as purchasing manager sentiment weakens.

This week an indicator called a “Flash PMI” will be reported for July. This gives an indication of the final PMI based on 85-90% of all surveys being complete. The Gradient Investment team will be watching both Flash and Final PMI’s to see if current trends persist. The health of the economy is one of the key fundamental tenets we monitor in determining our market forecasts. Therefore we’ll be watching PMI data closely to see if any changes to our forecasts need to be made.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on July 25, 2019 Read More
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