SECURITY SELECTION COMMITTEE VIEWPOINTS
Third Quarter 2015
- While the revised 2014 U.S. economic growth rate of 2.4% is well below that of typical recoveries, the expansion out of a very deep recession is also lasting longer.
- The most recent consumer confidence report indicated consumers may be more optimistic on the U.S. economy as consumer confidence jumped from 82 to 96 over the last year.
- Along with the Fed’s belief that the U.S. economy still has room for improvement, the rise in global uncertainties, such as the economic slowdown in China and the debt crisis in Greece, will likely cause the Fed to postpone the first interest rate increase beyond September 2015.
- The decline in the unemployment rate to 5.3% in June is most likely the result of a decline in the workforce as the labor force participation rate continued to decline to 62.6%.
- The most recent Job Openings and Labor Turnover Survey (JOLTS) indicates job openings are now outpacing hires as employers are having a difficult time filling highly skilled positions; thus, wage pressure may increase as employers offer more competitive salaries.
- While interest rates remain range bound, individual bonds held to maturity should continue to provide downside protection.
- Construction is expected to improve as building permits have surged in April and May, up 9.8% and 11.8% respectively.
- Market volatility began to spike after the end of QE3 due in part to a stronger U.S. dollar.
- It is likely that volatility will continue as long as the market remains concerned about the timing of rate hikes and global economic health.
- Emerging market economies remain at risk to rising U.S. interest rates; however, the asset class should be additive to long-term returns as demographics are favorable and the sub-asset class remains attractively valued at just 12.5 times next year’s estimated earnings.
- Low yields globally have supported foreign demand for U.S. bonds.
- Structural unemployment as well as a slow recovery from a severe recession may be playing a key part in the lowest labor force participation rate in 37 years.
These views represent the opinion of the Security Selection Committee which are based on qualitative as well as quantitative factors. These quantitative factors are primarily driven by valuation research which then forms our subjective assessment of the relative attractiveness of asset classes and sub-classes over a 3 to 5 year time horizon.
We expect the central bank to remain committed to an accommodative monetary policy which should keep current yields low relative to historical levels. Thus, we believe an overweight in stocks relative to bonds is appropriate from a risk/return perspective. Our focus on valuations has led us to believe that U.S. small-cap stocks are rich relative to historical long-term averages. Therefore, we have taken the opportunity to trim from U.S. small-cap equities in order to lock-in gains and increase our exposure in asset classes that are more attractively valued. Despite weaker growth outside the U.S., we remain disciplined and maintain a strategic allocation to foreign markets, especially emerging markets where valuations appear much more attractive. Foreign small-cap stocks should be additive to the portfolio return in the long-run as small-cap companies tend to enjoy higher earnings and cash-flow growth relative to large-cap companies. Since much of our small-cap exposure is in European small-cap companies, European accommodative policy should prove to be beneficial in the long-run as well. While our fixed income exposure remains underweight due to the current risk/return profile, we continue to purchase individual fixed income securities as bonds play a vital role in the portfolio.
We believe alternative exposure remains vital to portfolio diversification. While we maintain a position in U.S. REITs, we have taken the opportunity to trim where necessary due to our belief that the asset class has potentially reached overvalued territory after outstanding growth throughout the recovery. Additionally, we continue to hold our strategic weight in commodities despite recent lackluster performance. We believe that the long-run inflation hedge as well as diversification benefits will be well rewarded in time.
Note: This quarterly investment publication is intended to give clients a better understanding of Heritage Trust’s investment process and philosophy. If you have topics you’d like to see covered, please contact Jeff Asher, Director of Investments, at email@example.com