Key Sectors to Watch This Late in the Market Cycle

Fed Raises Rates: What’s Next?

In mid-December, the Federal Reserve announced the first rate hike in nearly 10 years. Here are four things to keep in mind.

1.	The first rate hike usually indicates economic improvement, not an imminent market downturn.

It’s important to keep in mind the context of today’s action. Historically, the first Fed hikes have not precipitated economic or market downturns. Typically, the first rate increase has been a signal that the economy has gained traction, and on average, asset markets have typically performed relatively well in the year or two after the first hike.

2.	This round of rate hikes may be gradual.

This round of rates hikes is starting as the Fed faces a far weaker backdrop for global growth—as well as much lower inflation—than is typical for the first rate hike in a cycle. This would seem to imply the Fed will move forward at a gradual pace of tightening. This weaker global and inflation environment makes a dramatic spike in interest rates less likely.

3.	Higher rates could pressure commodities and emerging markets.

It is important to keep in mind that Fed monetary tightening does tighten global dollar liquidity as well. Because the dollar is the world’s reserve currency, this tighter liquidity has made it more difficult for many asset prices in recent months—including emerging-market equities, non-U.S. currencies, and commodity prices. These markets may remain volatile in the aftermath of the Fed’s first hike.

4.	The economy could stabilize.

Finally, our outlook is that the global economy will digest the Fed hike over the coming months. The rate increase may even boost confidence in the U.S. economy by reassuring us all that we are finally on a path to normalization. And with the U.S. still in a steady mid-cycle expansion, we expect the global economy to stabilize over the course of 2016. Markets are likely to be choppy, but overall I think the outlook for equities should be relatively favorable as the year unfolds.

https://www.fidelity.com/viewpoints/market-and-economic-insights/fed-raises-rate?ccsource=email_weekly

© 2015 These presentations are provided for informational purposes only. Read relevant legal disclosures.

Performance of 12 Individual Asset Classes Over The Last 15-Years

1st Quarter 2011 Stats: Oil, Gasoline & Gold Jump

  
The price of a barrel of oil was $106.72 as of March 31, 2011, up +16.8% from its $91.38 per barrel price as of December 31, 2010 (source: CME Group).

The national average cost of a gallon of gasoline increased by +54 cents during the quarter, rising from $3.07 a gallon on December 31, 2010 to $3.61 a gallon as of March 31, 2011 (source: AAA).

The price of gold, which set an all-time nominal record close of $1,421 an ounce (i.e., non-inflation adjusted) on the December 31, 2010, set a new record close of $1,439 an ounce on March 31, 2011 (source: CME Group).

 

WSJ - Worst Decade in 200 Years for Inflation-Adjusted Returns

Many investors realize that stocks have been among the worst investments of the past decade. But they may not realize quite how bad the decade was, because most people forget about the effects of inflation.

Controlling for inflation takes extra work and makes stock gains look punier, so it is easy to see why stock analysts almost never do it. The media almost never do it either.

Despite its 2009 rebound, the Dow Jones Industrial Average today stands at just 10520.10, no higher than in 1999. And that is without counting consumer-price inflation. In 1999 dollars, the Dow is only at about 8200 and would have to rise another +28% or so to return to 1999 levels. Using today's dollars and starting at 10520.10, the Dow would have to surpass 13460 to get back to its 1999 level in real, inflation-adjusted terms.

Since the end of 1999, the Standard & Poor's 500-stock index has lost an average of -3.3% a year on an inflation-adjusted basis, compared with a +1.8% average annual gain during the 1930s when deflation afflicted the economy, according to data compiled by Charles Jones, finance professor at North Carolina State University. His data use dividend estimates for 2009 and the consumer price index for the 12 months through November.

Even the 1970s, when a bear market was coupled with inflation, wasn't as bad as the most recent period. The S&P 500 lost -1.4% after inflation during that decade.

That is especially disappointing news for investors, considering that a key goal of investing in stocks is to increase money faster than inflation.

But other things do get measured in real dollars. When economists report whether the economy is growing, they account for inflation. When analysts judge long-term gains in commodities such as gold or oil, they often adjust for inflation, noting that gold hit a record this month in nominal terms but remains far from its 1980 record in real terms. Because analysts almost never do the same with stocks, it leaves investors with an exaggerated view of their portfolios' performance over time.

"Looking at returns on a nominal basis can be very misleading," says Richard Bernstein, a former chief investment strategist at Merrill Lynch who is launching a New York money-management firm called Richard Bernstein Capital Management. He checks inflation-adjusted performance to monitor investments' real value.

Q&A: Pimco's Mohamed El-Erian - Courtesy of Fortune Magazine

Pimco's CEO says individual investors must change their investing style, such as being less U.S.-centric.
By Geoff Colvin, senior editor at large

Pimco, the world's largest bond investor, has benefited from investors' flight to quality over the past two years and now manages about $1 trillion in assets.

Mohamed El-Erian, 51, is still thinking large and deep thoughts; his book, "When Markets Collide: Investment Strategies for the Age of Global Economic Change," won the Financial Times Goldman Sachs business book of the year award last year.

 
Mr. El- Erian sat down recently with Fortune's Geoff Colvin to talk about threats to individual investors, the best framework for an investment portfolio, how the 2008 financial meltdown was like a double-drive-through McDonald's, and much else.

 Here's a sampling of  some of the questions....

We've had one quarter of solid economic growth. Is the recession over?

Why are a lot of very positive things unlikely to occur for the consumer?

If American consumers start saving more, isn't that a good thing?

From the perspective of an individual investor, is the multipolar world a good thing or a bad thing?

What are the most important things that individual investors need to do differently?

What's the best protection for an individual investor against inflation?

In your book you present an asset allocation for a typical U.S. investor. Only 15% is in U.S. equities, which is much less than most U.S. investors hold. And only 14% is in bonds, U.S. and non-U.S., which seems like not very much. What's the logic?

You've said that this asset allocation -- which includes many other elements [see table] -- could be expected to return +5% to +7% a year in real terms over the long run. Many investors believe that U.S. equities will return much more over time. Is that just not correct?

A lot of new financial regulation is in the works. Is it going to be, as it so often is, regulation that will prevent the crisis that just happened and not regulation that will prevent the next crisis?

After the September 2008 crisis, you mentioned in Fortune that you'd asked your wife to withdraw cash from the bank. What was your life like?

What's your bottom line advice to individual investors in today's environment?

Full Interview - Click Here: Investing Advice from Mohamed El-Erian: Q&A with Fortune - Dec. 10, 2009

Whoa! - The Money Supply Explodes +120%!

The money supply has gone parabolic!

In the past year the Federal Reserve has increased the money supply by a whopping +120%. That's never happened before. Recall that in the 1970s the Fed increased the money supply +13% and inflation soared into the double digits.

Gee, I wonder what inflation is going to be like after the money supply more than doubles? 

Now you know one of the primary reasons why:

1. Savvy investors and central banks around the world are exchanging this flood of depreciating dollars for gold, commodities and other hard assets.
   
   
2. India just bought 200 tons of gold and is thinking about buying 200 more.
   
   
3. Gold bullion posted another new high today, closing above $1,200 for the first time!

Chart courtesy of www.StockCharts.com