Transitioning Markets

iStock_000017803492XSmall-market-tickersThere are certain words we all use that have immediate connotations when heard. When I hear words like "interesting," "cozy," or "transitioning," sentences immediately pop into my head. "Wow....wasn't that an interesting candidate we just interviewed" which is code for "she was crazy." Or..."That's a cozy restaurant" which means you can hear the next table's marital woes blow for blow. Finally..."I'm transitioning professionally" usually means he's probably living at home with his parents. What we're witnessing in markets now and foresee in the future are markets "transitioning" which is code for "it's going to be harder to make money in U.S. markets." What do I mean?

A confluence of events are occurring which are impacting U.S., multi-national companies negatively. First, commodity weakness is tough on many emerging markets who produce commodities. The weakening demand means less production which means less importing of American goods, which hurts the Coca-Cola's, Yum Brands & Caterpillars whose earnings rely on foreign purchases.

Rising rates in the U.S. also means that U.S. Treasuries will be more inviting for all other currencies as rates increase in these investments. More foreign money will chase higher yielding, safer treasuries. This fact helps solidify our currency, but adds to the aforementioned trade problems.

So we believe the "transition" may mean that we have to look to foreign markets more heavily in Europe in 2016. The Quantitative Easing (QE) program in Europe has pushed the spread between their government and corporate bonds yields compared to stock dividend yields to a 50 year high. This discrepancy should push more investors to purchase investments with higher dividend yield versus traditional European bonds with lower interest yield. Citigroup analysts believe that European shares could grow as much as 70% by the end of 2016. (1) While we think this prediction might have been a bit exuberant, we can't argue with the fact that there are better valuation deals in Europe now. With the S&P 500 currently averaging a 19 Price-to-Earnings Ratio (PE ratio) and European indexes currently in the low teens, we believe there is more value abroad.

The discussions we are having with portfolio managers and their emissaries indicate a preference now and for the upcoming year for Europe-centric investments. Expectations from these same experts for large cap U.S. investments are in the 4-6% range in 2016-17.

What we believe all this means is we are not xenophobic when it comes to investments! In fact unlike Donald Trump, we'll be downright hospitable to foreigners and their companies if it can help our clients make money. Look to see gradual shifts in our portfolios if trends continue. See..."transition" can have good connotations too.

(1) “Market selloff is about the dollar: Koesterich.” Tom DiChristopher. 3/10/15. CNBC.com http//www.cnbc.com/2015/03/10/
• The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. • No investment strategy can guarantee success or protection against loss. Investing involves risk, including loss of principal. • The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. • The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio. • Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. • Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. • The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.