Why Holding Cash May Mean Losing Money

By Russ Koesterich -- BlackRock Chief Investment Strategist

Six years into one of the better bull markets of the modern era, investors are still holding onto a lot of cash. According to a survey last year by State Street’s Center for Applied Research, globally retail investors are holding 40% of their assets in cash. Is this a good idea? The answer may be no.

Negative returns. Cash is one of the three major asset classes and it serves several legitimate purposes in a portfolio: it dampens volatility and provides liquidity. The cost is that cash typically produces much lower returns than stocks or bonds. Once you adjust for both inflation and taxes, average returns have been negative.

Given that U.S. short-term interest rates are stuck at zero, and are likely to remain unusually low for some time even if the Federal Reserve starts to raise rates later this year, return for cash this year is almost certain to be negative. The only potential exception would be if the U.S. enters a deflationary environment.

Help cushion volatility with bonds. It’s true that the volatility of cash is low, but there are other ways to potentially bring down volatility in a portfolio: adding bonds is one option.

For the past five years or more, bonds have had a strongly negative correlation with stocks; in this environment, adding bonds to a stock-heavy portfolio now is highly diversifying. Unless you have an unusually low risk tolerance, an outsized cash allocation is rarely optimal.

No right amount. While there is no such thing as “the right amount” when it comes to cash or any other asset class, investors need to consider both their return objectives and risk tolerance when making allocation decisions that are right for them. For a portfolio with a multi-decade horizon and high return objectives, cash positions could be relatively small; cash has been adding little to expected returns and investors should be able to manage the volatility with a long investment horizon. The shorter the time horizon, the more cash you should consider holding. Barring a very short horizon—say two years or less—a 30%-40% cash position would likely result in a negative after-inflation return.

On the other hand, a large temporary cash position makes sense for market timers, who believe they have the skills to move in and out of asset classes and profit from such actions. But as the State Street numbers suggest, for many investors it is easier to get out of the market than to get back in.

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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. 

S&P IQ Talks Tactical Sector Strategies

S&P Capital IQ Research Director Todd Rosenbluth joined joined ETF Trends Publisher Tom Lydon at the ETF.com Inside ETFs conference in Hollywood, Fla. to discuss how advisors can tactically use sector exchange traded funds and what some of the hot sectors could be in 2015.

Rosenbluth highlighted economically-sensitive sectors, such as industrials and technology, as potential outperformers this year.

“Technology companies have stronger growth prospects than the broader market,” said Rosenbluth. “Capital IQ consensus data says 2015 is going to be a stronger year than the S&P, yet the sector trades a discount on P/E and a P/E to growth basis.

Rosenbluth also highlighted consumer staples and utilities as richly valued, noting that the utilities sector is home to a number of overvalued stocks and is vulnerable to rising interest rates.

The full video can be seen here.

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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 5.50% and year to date the portfolio is up 2.05% (as of 3 March 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. 

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.

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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.

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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.

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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.