Can U.S. Equity Still Deliver if the Fed Hikes?

By Russ Koesterich, CFA, Chief Investment Strategist for BlackRock

Federal Reserve (Fed) Chairwoman Janet Yellen’s testimony to Congress this week took a big step toward making clear something investors have assumed for some time: The Fed is on course for raising interest rates. True, that leaves the question of when (most likely in either June or September, but could be later) and how much (it should be a measured affair), but a big focus for investors now is: what will be the impact on equities?

Despite the post-crisis rewards of the U.S. stock markets so far (The S&P 500’s total return is up more than 230% since the lows of 2009) investors are keenly aware that much of the rise is owed to the Fed’s extraordinary unconventional monetary policy, mainly in the three rounds of quantitative easing. Therefore it is natural to wonder, if not worry, how markets might perform as the Fed moves toward normalizing policy. Will the multiyear rally come to an end? A few things to consider:

Look beyond short term. We took a look at the last tightening cycles in 1994, 1999 and 2004, to try to get an idea of how U.S. stocks might perform when monetary policy changes direction. In each of those cycles, the S&P 500 fell -3.3%, -6.2% and -1.9%, respectively, averaging a loss of -3.8%, in the three months that followed the initial interest rate hike. But if we expand the time horizon, the story becomes very different. For the 12 months after the first rate hike, the S&P 500 rose 4.8%, 7.2% and 6.3%, respectively, averaging a gain of 6.1%2. After the initial shock of the policy shift wore off, investors eventually returned to the markets on improved economic conditions. This is because rate hikes typically occur in the context of an improving economy. While the U.S. economy today is not fully healed, it is unquestionably improving, and it no longer requires a zero interest rate policy.

However, a big caveat is warranted: the current valuations of U.S. equities are above average, although not at “bubble” levels. And some areas of the market, the so-called “bond proxies,” like utilities, are currently very expensive. Given that, stocks can move higher, even after the Fed moves, but longer-term returns are likely to be below the historical average, probably in the low to mid single-digit range.

Prepare for a more volatile market. Another development you can expect as the Fed tightens: higher volatility. Based on observations on these past tightening cycles, markets became significantly more volatile early on in the cycle, although they settled down over the longer term. In recent years, the Fed’s extraordinary easing has kept markets unusually steady, which played a big part in boosting confidence in the financial and the real economy. Yet, as the Fed takes a step back, it is natural for volatility to rise and return to more normal levels, particularly if the rate increase happens sooner than expected.

How to consider positioning portfolios. In our view, stocks in general could continue to rise despite higher volatility, and as we have advocated for some time now, for some investors, stocks may still make better investments than bonds for the longer term. We do not expect the Fed’s upcoming rate hike to have a detrimental impact on financial markets over the longer term, and for markets in Europe, Japan and select Asian emerging markets, central bank accommodation in those countries should continue to support stocks. But in the U.S., while we believe improving economic conditions should continue to support U.S. stocks over the next year, their stretched valuations make lackluster returns more probable for the next year or so.

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

U.S. Tech Stocks Ride the Economic Cycle

By Heidi Richardson, Global Investment Strategist at BlackRock

The U.S. tech industry, particularly blue-chip, mature companies, has room to run in this expensive bull market.

We’ve talked about the hefty balance sheets held by some of the best-known, established brands, which can help them deliver returns to shareholders. And we’ve discussed how their strong quarterly earnings support their higher valuations.

Another reason we like mature U.S. tech is that it’s a cyclical industry. In other words, when the economy gets stronger, cyclical sectors like tech have tended to generate higher revenues through increased consumer spending. Companies with higher revenues have a greater opportunity to increase shareholder-friendly policies compared to industries that are “defensive” in nature.

Due to continued resilience in U.S. economic growth and anticipation that the Federal Reserve will likely raise interest rates this year, we’re starting to see investor sentiment transitioning from defensive to cyclical stocks.

As the economy grows, consumers tend to spend more on discretionary items and companies feel confident to invest in their expansion.

The U.S. tech sector is particularly poised to take advantage of this cyclical economic shift.  Health care, finance and other service industries are likely to increase investment in information technology―everything from data storage to new desktop computers. Also, the large millennial population will drive the usage of mobile technology and online networks.

And historically, tech has weathered interest rate hikes better than many other sectors. Today, the overall tech sector holds more than half of total corporate cash reserves in the U.S., which means if rates rise, mature U.S tech will better positioned to handle increasing borrowing costs and invest in their own growth.

We still see solid upside potential in U.S. tech stocks.  When’s the best time to buy? We anticipate increasing volatility in the stock markets this year, and tech is no exception. So keep an eye on market pullbacks and consider investing on the dips.

******

First Trust Nasdaq Technology Dividend Index Fund (TDIV) is a component of the D2 Capital Management Multi-Asset Income Portfolio.  Current yield on the portfolio is 5.56% (as of 23 February 2015).  year to date, the portfolio is up 2.29%.

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Don’t Exit Dividend Stocks Too Soon

By Richard Stavros, Investing Daily

With the Federal Reserve widely expected to begin hiking interest rates by midyear, the conventional wisdom is that it’s time to start cycling out of dividend stocks such as utilities.

But I would caution investors from exiting such investments before it becomes clearer how strong growth will be in the U.S. and around the world this year.

It’s true that yields can rise dramatically on the expectation of rate increases. For example, as the Fed moved to begin curtailing its extraordinary stimulus, the yield on the benchmark 10-year Treasury note went from 1.66% in early May 2013 to 3.04% by the end of that year–a jump of more than 83%.

But rates quickly reversed course when it became apparent that the economy was not nearly as strong as had been thought. While the 10-year is currently hovering just above 2%, a little more than two weeks ago it was trading at a trailing-year low of 1.65%.

Investors are concerned that slowing global growth could be a drag on the U.S., a risk that the Fed noted last year. As such, many economists expect the central bank to make only a modest move when it finally raises rates later this year.

And if current conditions persist, a small increase in short-term rates may have little effect on market dynamics or equity-income investments.

There are four potential trends that could continue to put downward pressure on Treasury rates and force the Fed to remain accommodative:

Slow U.S. Growth

Despite rising employment and a bubbly stock market, 2014 was not a breakout year for gross domestic product (GDP), which came in at a tepid 2.4%, still well below the long-term trend of around 3%.

And with only a few months since the conclusion of the Fed’s third round of so-called quantitative easing, it’s too early to tell if the economy has reached what economists deem “escape velocity.”

As noted earlier, the U.S. recovery is also dependent on how overseas economies fare. And economists are concerned that a Greek exit from the eurozone could further dampen growth in the European Union, undermining one of America’s largest trading partners.

Strengthening Dollar 

Central bank stimulus measures intended to prop up economies in Asia, Europe and elsewhere are also causing the devaluation of their currencies. That’s prompted a flight to safety among global investors, who are putting their money into dollar-denominated assets to preserve wealth.

But a strengthening dollar can be deflationary if it forces U.S. firms to lower prices in order to be competitive with companies overseas. Meanwhile, it also reduces earnings for firms that derive significant income from foreign markets.

In fact, J.P. Morgan recently published a research note speculating that fourth-quarter GDP expanded at an annualized pace of just 2%.

A key component of the bank’s forecast was a jump in the trade deficit during December to its highest level in two years. The trade deficit widened by 17.1% month over month, to $46.6 billion, as exports fell 0.8%, in part due to a rising dollar.

Although the government initially reported that the economy expanded by 2.6% during the fourth quarter, that figure was based on incomplete data and many economists now expect growth will be revised substantially lower.

Low Oil Prices 

Falling oil prices are often considered tantamount to a tax cut, since lower prices at the pump mean more money in consumers’ pockets.

While analysts are predicting a moderate rebound in oil prices during the second of the year, until that happens, anxieties that crude’s collapse is symptomatic of softening global growth will not be dispelled. As a result, the Fed will likely continue to be cautious.

Central Bank Stimulus 

The central banks in Europe (Switzerland, Denmark, Russia), Asia (India, Singapore, New Zealand, and Australia), and North America (Canada) all made recent dovish moves.   China also jumped on the accommodative bandwagon by trimming banks’ reserve requirements to stimulate lending.

Although theses easing measures are positive from the perspective of supporting the U.S. recovery, they will also put pressure on Treasury rates as overseas investors seek safe havens in U.S. Treasuries and other dollar-denominated assets, which will keep rates low and the dollar strong.

Consequently, dividend stocks should continue to be competitive with Treasuries far longer than many had previously expected.

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Technology for Dividends? Yes

By David Fabian, FMD Capital Management

The technology sector has been a strong area of the market over the last several years and many investors likely have exposure to some of these individual stocks or an associated exchange-traded fund. Companies such as Microsoft Corporation (MSFT), Texas Instruments Incorporated (TXN), Apple Inc. (AAPL), Facebook Inc (FB) and Google Inc (GOOG) are just some of the top names in the tech sector.

The First Trust Nasdaq Technology Dividend Index ETF (TDIV) is an example of a fund that may be attractive for investors looking to add an equity income component to their portfolio. TDIV currently has 95 holdings of technology-related companies with a history of paying dividends. Components within the index are weighted according to their dividend payouts and rebalanced on a quarterly basis.

The end result is a diversified basket of technology and telecommunication stocks with above-average yields. The current 12-month distribution yield on TDIV is 2.8%, based on the past one year of income.

******

First Trust Nasdaq Technology Dividend Index ETF (TDIV) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.55% and year to date the portfolio is up 1.95% compared to the S&P 500 which is up 1.64% (as of 12 February 2015).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Fundamentals to Support Real Estate Investment Trusts

By Tom Lydon, ETF Trends

Even if interest rates rise, the improved economic outlook and strength in the commercial sectors could reinforce real estate investment trusts and related exchange traded funds.

Over the past year, Vanguard REIT ETF (VNQ) rose 31.4%, iShares Dow Jones US Real Estate Index Fund (IYR) gained 27.4% and SPDR Dow Jones REIT ETF RWR) increased 32.6%.

Fund managers argue that while the real-estate funds may experience short-term swings due to interest rate changes, the funds’ underlying outlook remains positive, pointing to a growing U.S. economy, improving employment rate and greater foreign investment demand for U.S. REITs, reports Tom Lauricella for the Wall Street Journal.

“Real-estate fundamentals are pretty solid,” David Wharmby, global head of real-estate securities at Cornerstone Real Estate Advisers, said in the WSJ article.

Nevertheless, the recent outperformance of the REITs space has been fueled by the unexpected rally in U.S. debt, which has made real estate assets a more attractive yield-generating alternative. For instance, VNQ has a 3.37% 12-month yield, IYR has a 3.47% 12-month yield and RWR has a 2.87% 12-month yield. REITs are required to pay out 90% of their taxable income to shareholders to capitalize on tax benefits.

Samuel Wald, manager of Fidelity Advisor Real Estate, argues that short-term traders will act on interest rate moves, but the long-term outlook is more stable. Specifically, Wharmby points out that it is currently a landlord’s market as long as the economy continues to grow. John Wenker, a co-manager of the Nuveen Real Estate Securities Strategy, also believes that the general profit outlook for real-estate companies is very positive, compared to the broader equity market.

“The underlying real estate is a much more slow-moving asset than what goes on in Wall Street,” Wald said. “We like to say that REITs act like stocks in the short run, but act like real estate in the long run.”

While REIT investors may expect some short-term volatility, following a knee-jerk reaction to rising rates, the REITs space could continue to strengthen, along with an expanding economy.

******

Vanguard REIT ETF (VNQ) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.57% and year to date the portfolio is up 1.34% compared to the S&P 500 which is up 0.62% (as of 10 February 2015).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Golden Years May Be A Bust For Millions Of Retirees

By Kathy Lynch, Financial Advisor Magazine

Millions of people will need to lower their standard of living in retirement because they haven't saved enough, according to a recent report by the Center for American Progress.

The report found an American public that is struggling to prepare for retirement and one that is less prepared than previous generations. In addition, a large portion of individuals may have to rely on family, charity and government aid programs for financial support and forgo their pre-retirement lifestyles.

Three clear trends illustrate the extent to which people are underprepared for retirement, according to the report.

• A large percentage of people are saving nothing for retirement. Approximately 31 percent of Americans reported having zero retirement savings and lack a defined-benefit or pension plan.

Among respondents nearest to retirement, ages 55 to 64, the share that reported having no savings was 19 percent, or approximately one out of every five near-retirement households.

One reason is the lack of access to workplace retirement plans. As of 2014, only 65 percent of private-sector workers had access to a retirement plan through their jobs, and only 48 percent participated in one, according to the report.

And studies show that the share of private-sector workers with access to workplace plans is actually lower now than it was in the late 1980s.

• Families that are saving often have insufficient assets. As defined-benefit pensions become increasingly rare, workers need to build up savings in defined-contribution plans such as 401(k)s or in individual retirement accounts (IRAs), the report found.

However, as of 2013, the median retirement account balance among all households headed by people ages 55 to 64 was only $14,500. After excluding households that had saved nothing, the median account balance of near-retirement households was still only $104,000.

If all of this money was used to purchase an annuity that would pay a guaranteed monthly income for the rest of the individual’s life, this income would provide only about $5,000 per year in retirement, the report said.

• Households should increase their savings relative to prior generations but they are not doing so. One simple way, according to the Center for American Progress, to measure how capable households will be of maintaining their standards of living in retirement is to look at the ratio of their total wealth to their income. This gives an idea of how much in total assets a family has built up relative to approximately how much they consume in a given year.

Christian Weller, one of the authors of the report, said that after taking many factors into consideration such as pensions, Social Security and home equity, "The rule of thumb for the wealth to income ratio is about 10 to one, meaning a person making $50,000 for the majority of their career would need about $500,000 to maintain their standard of living in retirement."

These ratios did improve for near-retirement households during the 1990s and early 2000s, but collapsed following the Great Recession and have shown no signs of recovering. According to data from the Survey of Consumer Finances, households near-retirement age were worse off in 2013 than they were in 1989.

This represents an even bigger problem for retirees because their needs have grown significantly in recent decades, according to the report. Life expectancy has increased, and the retirement age for full Social Security benefits has risen to age 67.

Health care costs have also risen substantially, and the decline in real interest rates since 1983 means that a given amount of wealth accumulated today produces less retirement income than it would have in previous decades.

For all of these reasons, the Center for American Progress says workers should be approaching retirement with greater wealth relative to their income than previous generations did.

However, the opposite is occurring, which may force people to continue working beyond when they intended and they may need to rely on families, charities and government aid to make ends meet in retirement.

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Fewer Americans Have Retirement Plans

By Ted Knutson, Financial Advisor Magazine

Fewer Americans have retirement plans than a year ago and five years ago, according to a new study by the Investment Company Institute, the mutual fund industry trade group.

ICI reported Wednesday 63 percent of U.S. families had retirement plans through work or individual retirement accounts in 2014, down from 67 percent in 2013 and 68 percent in 2009.

While participation has dropped, assets have skyrocketed.

Americans’ retirement savings have nearly doubled in five years to $7.3 trillion.

That number was helped by a growing stock market, but not an increased willingness of adults to put money away for the future.

The number of households contributing to IRAs declined to 12 percent for the 2013 tax year from 15 percent in 2012 and 15 percent again five years previous.

Rollovers dropped as well. According to ICI, among families with rollovers in their IRAs, 81 percent said they had transferred the entire balance in their most recent rollover, a dip from 85 percent the previous year and 89 percent five years ago.

More people are talking to financial advisors before withdrawing money from IRAs, according to ICI.

The study showed 64 percent of adults taking out funds in 2014 consulted with a financial advisor about making the decision, an increase from 58 percent in 2013 but down from 72 percent five years earlier.

Likewise, individuals are becoming more hesitant to make the move on their own: 7 percent did so in 2014, half the number that did in 2013.

Roughly a third of withdrawals were $20,000 or more in the 2013 tax year against only 20 percent for 2012 and 16 percent in 2008.

The bigger withdrawals may be to meet legal requirements triggered by growth in the value of individual IRAs because of the rising stock market. “Typically withdrawals from traditional IRAs were taken to fulfill required minimum distribution requirements,” said ICI in the report.

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Municipal Bonds: What Comes After Perfect?

By Peter Hayes, Managing Director, head of BlackRock’s Municipal Bonds Group

As records go, you can’t beat 12 for 12. Perfection is good … and bad.

Muni investors enjoyed a perfect run in 2014 as the market notched a positive return each and every month, leading the S&P Municipal Bond Index to an annual return of 9.26%.

What could be bad about that? It sets some pretty lofty expectations for 2015. I’d like to provide some context and perspective for investors.

The Stars Aligned in 2014

The stars aligned in spectacular fashion for the municipal bond market in 2014: Low supply amid solid demand, improving fiscal conditions among state and local issuers, and a broad drop in interest rates (and rise in bond prices) helped make munis one of the top-performing fixed income asset classes of the year.

Many of the favorable dynamics remain firmly intact at the start of 2015. But we don’t expect 2015 to be a 2014 repeat, if only for the simple fact that munis aren’t built to provide 9% returns. They are intended to be a high-quality, relatively low-volatility source of income. Also consider the fact that the Federal Reserve is likely going to start raising interest rates this year, and that will create volatility and some measure of uncertainty for all fixed income assets.

What Is in the Stars for 2015?

In setting expectations for 2015, a look at long-term patterns is informative. Historically, returns in the year following a bounce back year (and yes, 2014 was a big bounce from a dismal 2013) have been two-thirds lower than the bounce. Given a return of 9.26% in 2014, that would equate to a return of roughly 3%-3.5% in 2015.

******

The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.47% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 4 February 2015).  Year to date the portfolio is up 1.22%

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Where to Look For Opportunities Amid Turbulence

By Russ Koesterich -- BlackRock Chief Investment Strategist

Market volatility hadn’t let up this past week: sharp swings can be seen in stocks, interest rates and oil prices. For now, we believe investing in a combination of international stocks and credit offers the best relative value.

With stocks, favor international. Stocks struggled last week, although the losses again were most pronounced in the United States. For January, U.S. stocks were down, while stocks in Japan, Europe and even emerging markets experienced gains. Part of the problem: The stronger U.S. dollar is negatively affecting earnings of U.S. large cap companies. This could change down the road, as benefits of cheaper energy catch up to offset that drag. In fact, a pickup in housing spending is emerging: in the fourth quarter personal consumption rose at the fastest pace since the first quarter of 2006. But for now, a fast appreciating dollar and high expectations are acting as headwinds for the U.S. equity market.

Given this dynamic, we believe it makes sense to look outside the U.S. for value. European equities are benefiting from the European Central Bank’s quantitative easing, as well as stabilization in economic indicators and improvements in lending. Japan’s market is aided by a slight decrease in the jobless rate and a pickup in industrial production. Going forward, as Japanese companies raise their notoriously low return on equity, Japanese stocks should be supported by relatively cheap valuations and rising dividends. Sector-wise, energy stocks are unsurprisingly struggling, but we see value in integrated oil companies, which could benefit from a stabilization in the price of crude.

With bonds, prefer credit. With stocks remaining under pressure, investors continued to favor U.S. Treasury debt, causing interest rates to grind lower (as prices rose). Last week, the yield on the 10-year Treasury note broke below 1.70%, the lowest level since the spring of 2013, despite an upgrade in the Federal Reserve’s (Fed’s) assessment of U.S. economic conditions. The Fed faces a difficult balancing act: trying to reconcile the competing trends of a strong U.S. labor market with a soft global economy and declining inflation expectations. Nonetheless, we still believe the Fed will increase interest rates at either its June or September meeting.

With yields down, investors are exploring other parts of the bond market that offer the prospect of higher income. We prefer tax-exempt municipal bonds, as well as U.S. high yield debt.

Oil nears its bottom?

Oil prices pushed lower for most of last week on the news that U.S. commercial crude inventories rose to the highest level for this time of the year in at least 80 years, though prices reversed sharply on Friday. While we think oil prices are approaching their bottom, we are beginning to see the dramatic impact depressed oil prices have on energy company behavior. For example, Shell announced a $15 billion cut in capital expenditures, and the number of U.S. horizontal oil rigs dropped by more than 200 in just the last two months. This slowdown in future exploration and production should lead to a price stabilization in oil.

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

More Upside Seen for a Popular Real Estate Investment Trust

By Todd Shriber, ETF Trends

Last year started with scores of market observers and pundits calling for interest rates to rise. That thesis was, of course, proven wrong and as Treasury yields tumbled, an array of rate-sensitive asset classes soared.

That included real estate investment trusts (REITs) and exchange traded funds such as the Vanguard REIT ETF (VNQ). The new year has started in similar fashion. Ten-year yields slid 23.5% last month, helping launch rate-sensitive bond funds, such as the iShares 20+ Year Treasury Bond ETF (TLT) and the PIMCO 25+ Year Zero Coupon US Treasury (ZROZ) to double-digit gains.

All of that is good news for VNQ, the largest REIT ETF, and rival funds. It is also enough to make VNQ S&P Capital IQ’s focus ETF for February.

“REITs performed well in 2014 and in early 2015 as investors sought out alternative income opportunities with the yield on the 10-year Treasury falling below 2.0%. However, we think REITs can still perform well even if yields climb higher in 2015, depending upon the confirmation and timing of potential rate hikes by the Federal Reserve. We believe the industry is economically sensitive and many of its constituents will be aided by a still-improving U.S. economy. REITs have little to no exposure to weaker geographies in Europe and Asia,” said S&P Capital IQ in a new research note.

After surging 30.4% last year, VNQ is up 5% to start 2015. REITs provide a liquid alternative to owning physical commercial real estate properties. REITs investments also share similar attributes with stocks and bonds. Since REITs are required to distribute at least 90% of their income from rent payments to investors, these real estate investments can generate attractive yields.

Some may be concerned that REITs are sensitive to changes in interest rates. Notably, the fall in interest rates have made the asset more attractive as a yield-generating alternative, but some fear the asset will fall out of favor once rates rise.

“S&P Capital IQ has a positive fundamental outlook on the retail REITs sub-industry. Although challenges remain, we think increasing absorption of retail space should present retail landlords with more pricing power. We expect consumer spending and retail sales to improve over the next 12 months, which should prompt a further slowdown in store closings. We still look for same-property revenue and net operating income to be positive across the sub-industry over the next 12 months. Most retail REITs have long-term leases with their customers that possess embedded rent adjustments that should help insulate them from economic fluctuations,” said the research firm.

After pulling in over $4.7 billion in new assets last year, enough to place it among the top 10 asset-gathering ETFs, VNQ has already added nearly $500 million in new assets in 2015.

“VNQ trades approximately 5 million shares on a daily basis and has a tight $0.01 bid/ask spread. We also believe the ETF is trading with bullish technical trends. Investor interest has been strong with more than $5 billion of fresh money moving into the ETF in the last 12 month,” said S&P Capital IQ.

The research firm rates VNQ overweight, S&P’s highest ETF rating.

******

Vanguard REIT ETF (VNQ) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.57% and year to date the portfolio is down 0.35%, compared to the S&P 500 which is down 2.96% (as of 2 February 2015).

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.