This past week, Greg and I had the opportunity to attend the Fall Partner meeting in Hilton Head Island, South Carolina. These meetings are a great chance for us to hear from industry leaders on legislative changes, economic and market trends as well as share best practices with the other 70 HighTower teams from around the country. As a member of the team’s Investment Committee, I wanted to share some of the common themes we heard throughout our meetings and conversations and how they might impact the way we position portfolios for 2017.
General Thoughts and Views:
• Most strategists agree that this slow growth environment will be with us for a number of years and that two years from now, the US economy will still be muddling along.
• Expect volatility to remain high as we enter this period that one strategist called “The Great Unwinding Period”. With slow growth, interest rates gradually moving higher as the Fed moves to normalize interest rates and the US market reaching levels where valuations are stretched.
• From 2009 to 2016 the S&P 500 has gone from trading at 10X earnings to 17X. With valuations at these levels most strategists are suggesting it is time to look outside the United States for equity exposure.
• Yields are on the rise. The big surprise in October which has caused the market to pull back recently has been the rise in the 10 Year Treasury bond yield which has gone from 1.30 to 1.80%. Most of the strategists we heard from suggested that the 10 Year Treasury would end the year 2017 at a 2.25% Yield.
• Returns are getting more difficult via a balanced portfolio. With bonds earning 1-2%, stocks projected to be mid-single digits, we could be looking at a projected blended return of just 3-4% for the next several years. Only by looking outside the US as well as non-traditional alternative investments can we potentially enhance these returns.
Actions to Consider:
• Equity portfolios should be globally allocated with exposure to emerging markets and other developed markets including international small cap stocks where better growth opportunities exist. Underweight US stocks and overweight international stocks.
• Alternative investments that are not tied to public markets and strategies that can capitalize on volatility like managed futures strategies provide the opportunity for additional diversification and improved returns.
• Be nimble and deploy cash as we experience dips during more volatile periods.
• Favored sectors for US stocks include: technology, financials and large cap pharma companies with attractive dividends.
• Tax efficiency is always important but in a lower return environment what you keep is as important as what you earn. It will be important to think about asset location making sure the less tax efficient investments are held in tax deferred accounts as opposed to taxable accounts.
Frank Masse, ARPC®
Managing Director & Partner