Opportunities Abound!

By Betsy Gibson

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Undoubtedly the three most important factors determining the success of any investment strategy are asset allocation, diversification, and discipline. Once those three components are securely providing your investment strategy framework, it’s then appropriate to look for tactical investment opportunities. Investment opportunities may present themselves at any time, but it is helpful to recognize them (or actively seek them out) in terms of our current and anticipated macroeconomic landscape.

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So what does our current landscape look like now and what are the current factors to consider when it comes to investing? Starting at home, our improving U.S. economy, spurred by both modest job growth and lower fuel prices, is the most significant factor to consider. At the time of this writing our employment rate has fallen to 5.5%, and while we have not seen wage growth yet, we should expect wage growth over the next few years if the decreasing unemployment trend continues. We have enjoyed lower fuel prices at the pump since late 2014; the effects of lower fuel prices on our economy should begin to materialize in a meaningful way in the form of increased spending power for the consumer and increased spending power for those businesses relying on large energy inputs.

As our economy improves at home we can expect an eventual return to a more normalized interest rate environment. An enormous amount of media attention has been placed on the removal of the word “patience” from the Federal Reserve’s language and whether the Federal Reserve will introduce a rate hike in September or later. Investors will be well served if they can divert attention from the noise and refocus attention on the big picture. Although we are facing a rising interest environment which presents specific challenges, interest rates will remain low on a long term relative basis for a while.

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So what about the rest of the world? The 2008 financial crisis truly played out on the global stage, and the recovery continues to be a global one even if it is not synchronized across the regions. Economic recoveries of the rest of the developed world have lagged our domestic recovery, but monetary policy measures taken in developed Asia and Europe should bolster recovery going forward.

In addition to quantitative easing, weaker currency relationships to the U.S. dollar and lower energy prices become significant economic tailwinds in most of Europe. Emerging economies (economies such as Brazil, Russia, India, and China) can struggle under the strong greenback by having to use more of their funds to pay off U.S. dollar denominated debts thus leaving fewer funds left over to invest in development. Over time, however, a strong dollar effectively makes goods and services in other countries more attractive, so a natural balance is triggered. A more balanced global economy should be anticipated over the next few years. Opportunities for investors seeking income or growth over the long term can be found keeping these factors in mind.

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Investing for income has been less than a straightforward task in recent years. Money market funds, certificates of deposit, and high quality corporate bonds have not produced enough yield to be effective income instruments, and this should continue to be the case for a bit longer. In the world of traditional fixed income instruments, municipal bonds with their tax-free interest payments currently offer good opportunities for many investors. Those who value tax-free current income over the total return of the investment will continue to be satisfied here.

One advantage of a rising interest environ- ment is that it makes the bond ladder strategy effective again. By building a bond ladder with measured, varying maturities from short to long, the maturing bonds can be reinvested at the end of the maturity spectrum at higher rates. It has been a few years since this strategy could be usefully employed.

For income seekers who can tolerate more fluctuations in valuations, equity income (dividend paying stocks) will continue to be attractive. When looking at dividend paying stocks as a source for income, look for moderate yields from companies that have historically increased their dividends or companies that have the financial capacity to increase their dividend payouts going forward. Many of the large U.S. companies that operate on a global level (i.e. derive a chunk of their sales abroad) are experiencing declining revenue and lower earnings due to the strong dollar. As these declines suppress valuations in the near term, income investors may find attractive yields especially if they retain a long term focus. Such multinational dividend-paying companies in industry sectors that benefit most from an improving global economy (i.e. industrials, financials, technology, and consumer discretionary) should be considered.

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Publically traded master limited partnerships, with their partially tax sheltered distributions, are worthy alternatives for income seekers. Most master limited partnerships (MLPs) operate within the oil and gas industry, so it is important to consider the effect of suppressed energy prices on the profitability and performance of these investments. Generally MLPs engaged in fee-based transportation and storage of energy will see less energy price sensitivity than other members of the group.

Based on where we are in the market cycle, investing for growth still looks promising over the next few years whether your objective is moderate growth or aggressive growth. As mentioned, our improving economy should bode well for companies here at home in economically sensitive industry sectors such as the industrial, financial, technology, and consumer discretionary sectors. Something will have to be done with the money that consumers are no longer spending at the gas pump; that money will have to either be saved or spent. This should translate into long term investment opportunities for financial and asset management industries (saved) and in consumer discretionary industries like retail and restaurants (spent). As our economy improves we should see continued corporate spending on research and technology. Biotechnology and technology that supports the rapidly multiplying internet of things (i.e. smart watches, self-driving cars, home monitoring systems, etc.) are areas that should see measurable growth. Along those lines, the broad expansion of technology and data accumulation should also create increased demand for internet security services.

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Investors looking for moderate growth should also look abroad as the economic turnaround begins in developed Europe and Asia. Long term investors may be rewarded by stepping into this asset class which has been out of favor recently. The key to success in international investing over the next few years will be diversification across both industry and countries.

Historically investors with aggressive growth objectives have found the best opportunities in small cap companies and in emerging market investments, and the next few years should not be any different for aggressive growth seekers. Small cap companies because of their size (under $2 billion) offer the most potential for growth and expansion.

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Additionally smaller companies tend to thrive during times leading up to and during times of economic prosperity. Emerging economies often realize much higher growth rates than their developed counterparts. Even though we have currency headwinds negatively impacting emerging economies in the near term, the long term trend of accelerated growth in developing regions should remain. 40% of the world’s population is considered to be emerging, and that translates into significant consumer potential. Because of the additional risks associated with investing in small cap companies and emerging markets, diversification becomes even more paramount. Most investors will do best accessing these asset classes through mutual funds or ETFs. Employing a dollar cost averaging strategy (making investments at predetermined regular scheduled intervals) can also improve the chances of success with these more aggressive growth investments.

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