The Federal Reserve is circling the market in very hawk-like fashion this Friday after the latest jobs report hit the wires.
The Bureau of Labor Statistics announced that July non-farm payrolls added 215,000 new jobs, while the unemployment rate remained unchanged at 5.3%. May and June’s results were also revised higher by a combined 14,000.
Even though the majority of the jobs continue to be of the lower-paying variety, pay growth remains nonexistent and the participation rate of able-bodied Americans lingers at a 38-year low, many traders around the globe are looking to the Federal Reserve to lift rates at the September FOMC meeting.
The continued will she/won’t she debate of when Yellen will finally announce the first interest-rate hike is keeping investors anxious and adding uncertainty to the market. But you don’t have to run for the sidelines to protect your wealth…
The Threat of the Federal Reserve
Janet Yellen is driving traders insane as they try to enjoy the last days of the market rally while edging toward the exits, preparing for the impact of that first rate hike. But what is that right first step? Do you unload everything and sit in the safety of cash? Do you move your investments to Europe or Asia? Is it time to buy gold?
To help answer these questions, I’ve turned to members of our Council of Experts again to offer up some guidance as to what they see coming in the next 12 months and where they think the next big opportunities are.
Chris Gaffney is Senior Vice President and Director of Sales for the World Markets® division of EverBank. His involvement with the World Markets team began in 1987. Chris holds series 7 & 63 licenses and received a BSBA from Washington University with an emphasis in Accounting and Finance. He holds a Chartered Financial Analyst® designation.
After 16 years as Executive Publisher for The Sovereign Society and Dent Research, divisions of Agora Publishing, Erika Nolan is now the CEO of the 1291 Group of the Americas. The company is an independent wealth-planning firm that specializes in tailored asset protection and tax/estate planning solutions as well as unique asset management options.
Eric Roseman is the founder, president and chief investment officer of ENR Asset Management Inc. based in Montreal, Canada. He was also a founding contributing editor for The Sovereign Society in 1997 and served as the investment director from 2007 to 2010. Since 1991, Eric has employed a global-asset allocation approach to investing, offering traditional and non-traditional investment programs.
Jocelynn: What is the biggest threat to the U.S. investor in the near future (next 12 months)?
Chris: I think a dramatic correction in the U.S. equity market in reaction to an increase in interest rates by the Federal Open Market Committee (FOMC) is a big threat for U.S. investors. The Federal Reserve seems to be set on getting rates off of zero and I don’t think most equity investors are pricing this in. A rate increase could trigger a sell-off in U.S. equities, which could rapidly grow to become a full-blown correction.
Erika: The biggest threat to investors right now is uncertainty. The U.S. market is at historic levels with historically high PE ratios and profit margins, as well as strong market returns over the last few years. We also have historically low interest rates. The move from 0% rates is unprecedented. It’s hard to call if the U.S. markets continue like this or if a move in interest rates, or some unforeseen event, causes a big shift.
Eric: The biggest threat to the U.S. investor is tail risk or a market dislocation that’s unexpected. The Federal Reserve raising rates, China slowing down or Greece collapsing will not tip the markets into a bear market or the next crisis. Instead, U.S. leveraged loans, the bubble in Asian debt or another event related to credit markets might be the next catalyst and would probably be triggered by a series of Fed rate hikes later this year or in 2016.
Jocelynn: What are your predictions for the U.S. markets over the next 12 months?
Chris: The low-growth, low-inflation environment, which we are currently in, is good for U.S. companies doing business locally. So I think the U.S. equity markets will see a slight increase over the next 12 months. The strong dollar will have a negative impact on companies that do a large portion of their business overseas, and the low oil prices will continue to be a drag on the energy sector. But the low oil price should finally start leading to more consumer spending.
Eric: We still think stocks will finish higher over the next 12 months provided the Federal Reserve hikes rates gradually, if at all. But foreign stocks, after lagging U.S. stocks since 2010, should start to outpace the S&P 500 Index over the next few years. Europe should be an overweight as the European Central Bank (ECB) continues to print money and forces more investors out of bonds and into stocks.
The Key Is Diversification
The Federal Reserve is keeping investors on their toes, but that doesn’t mean that there aren’t opportunities that will continue to rise even after the Fed finally decides to act.
Jocelynn: What is the No. 1 thing an investor should do to protect themselves? What is the biggest opportunity you see over the next 12 months?
Chris: We always preach diversification and believe that is the best thing an investor can do to protect themselves. A portion of their portfolios should be invested into the non-correlated asset classes of currencies, precious metals, real estate, etc … Also, the portion that is allocated to equities and fixed income should be diversified across international markets.
I like the European equity markets which continue to be supported by the ECB’s quantitative easing policies. I also think the Indian rupee (INR) and Chinese renminbi (CNH) are good opportunities for currency investors. Finally, I think the U.S. equity markets will continue to present some good opportunities, after the initial shock of the first interest-rate increase is in the rearview mirror.
Erika: The safest thing to do when you are uncertain is to hedge. Don’t put everything you have into one market and assume (or hope) it will keep going up … or one currency or one asset class. The time is now to begin to diversify your wealth while being aware of the variables that exist. With the current strength of the U.S. dollar, dollar investments are important and valuable. However, when the dollar strength begins to wane, it will be hard to know if it will lose value quickly or little by little. The same is true for the U.S. markets. If U.S. interest rates increase, the market could slow. Planning for the unexpected now, in small, easy ways could pay off very nicely.
The biggest opportunity is to use the uncertainty to move some of your assets from currently strong assets into underperforming ones. But do so wisely. Use the idea of dollar cost averaging. Use today’s strong dollar to add European blue-chip stocks that may be currently undervalued to your portfolio. Or add income generating stocks in a currently weaker Asian market. Gold and oil stocks are also currently cheap. Nothing stays static — the key is to be alert and well positioned for whatever may play out. As Charles Darwin once said, “It is not the strongest of species that survives, nor the most intelligent. It is the one that is most adaptable to change.”
Eric: The best market protection is a combination of put options on the S&P 500 Index, call options on the VIX and a high cash balance. Equally, reverse index exchange-traded funds on the S&P 500 Index will also suffice.
Commodities are down more than 55% since hitting highs in July 2008 and remain very cheap. The entire mining space has been nearly destroyed, the energy sector has corrected sharply and the precious metals are in a bear market. Hard assets offer great opportunities but only for high-risk investors. For most other growth investors, we like European large-cap and small-cap stocks and German exporters such as Siemens, Henkel and Beiersdorf.
Escape the U.S. Market
Most American investors are content to leave their wealth trapped in American companies, exposing their assets to the vulnerability of a single currency — the U.S. dollar. But diversifying your wealth outside of the U.S., investing in a variety of currencies, as well as opportunities in various countries, offer protection against a potential meltdown of the U.S. market.
Of course, the hard part is knowing the best ways to gain that offshore exposure. That’s why we’ve invited experts such as Chris, Erika and Eric to the Total Wealth Symposium to offer guidance and insight to their different markets. From October 14 through 17, you will learn how best to protect and grow your assets in the uncertain times ahead.
Sr. Managing Editor, Sovereign Investor Daily