The Wall Street Journal (WSJ) reported today that manufacturing is up globally, but in particular the U.S. manufacturing index in March registered its best month in nearly six years. As a result, most economists believe that a double dip recession is not in the cards for the U.S.
Also announced in today’s WSJ was that U.S. car sales surged 24% in March. Thus, supporting the prior claim that manufacturing is rebounding. It appears to me that many consumers that have held off purchasing / replacing cars, appliance, etc. are no longer waiting to do so. In spite of this good news, unemployment still remains stubbornly high because most companies are holding off on hiring.
For those looking for work this may not sound reassuring. However, I do continue to read and hear more and more positive economic news that leads me to believe this economy is on more stable footing. This being said, most investors have not jumped on the “economic recovery” bandwagon.
Where is the money going?
Investment Company Institute tracks the flow of mutual fund investing. As has been the case for many months, investors continue to prefer bond, balanced and international stock funds. Ironically, even though the U.S. stock market has had a nice recovery from its lows, U.S. stock funds continue to lag on the money being allocated to them and by a large margin. Actually, I believe this is a very good sign. This means that as investors become risk tolerant and seek higher returns, they will begin to allocate more of their money to U.S. stocks. As Robert Adler, head of Lipper FMI America’s noted in the March 22, 2010 WSJ, “Investors are hungry for returns and see that opportunity in equities right now … It creates upward pressure on prices”.
With improving economic conditions, many corporations are raising the dividends they pay on their stock. This is just icing on the cake to get investors to embrace U.S. stocks and can provide an additional boost to share prices for all. However, I believe the returns going forward in the next twelve months will be much more subdued than the previous twelve, but that does not mean we can’t see double digit returns for 2010.
A Fixed Income Show-Down
Several of the largest fixed income / bond fund managers have different opinions on where interest rates and the bond market are headed. In recent weeks I have read several articles regarding what some fixed income managers think about the outlook for bonds.
The heads of fixed income at the Vanguard Group and Pimco Funds both are bearish on long-term bonds and within this group most specifically U.S. government. Their belief is that once interest rates begin to rise, long-term U.S. government bonds may see a dramatic decline in value. This is separate of these bonds losing their AAA rating as they are downgraded (due to the concerns of the U.S. government struggling to cover all its debt obligations). On the flip side of the coin, BlackRock’s chief investment officer for fixed income stated that prospects of unsteady economic growth, sovereign (i.e., government) debt woes in the euro zone and contained inflation risks makes him favor long-term U.S. government bonds with maturities of 10 years or more.
Vanguard, Pimco and Blackrock are giants in the investment industry and combined manage trillions of dollars; however, they have completely different opinions on future of the bond market. Personally, I side with Vanguard and Pimco. I believe long-term U.S. government bonds are paying extraordinarily low interest rates and will decline in value once interest rates start increasing. As we have seen with Greece recently, a government-backed security is not considered a safe bet if that particular government cannot get its financial house in order.
As I have stated in previous commentaries, I believe under current conditions, intermediate to shorter-term bond maturities (i.e., 10 years or less on average) is a much better time frame for investors. In addition, I am an advocate of investing in a variety of bonds including corporate and foreign government bonds. As such, I continue to look at and invest in a variety of bond funds, but the overall mix of them is intermediate in time frame.
Quotes
“Those who corrupt the public mind are just as evil as those who steal from the public purse.”
Adlai Stevenson, statesman
“How you spend your time is more important than how you spend your money. Money mistakes can be corrected, but time is lost forever.”
David B. Norris, attorney
“Do you know the difference between education and experience? Education is when you read the fine print; experience is what you get when you don’t.”
Pete Seeger, folk singer
“You will never be the person you can be if pressure, tension and discipline are taken out of your life.”
James Bilkey, writer
“One’s dignity may be assaulted, vandalized and cruelly mocked, but it cannot be taken away unless it is surrendered.”
Michael J. Fox, actor
A happy Easter weekend to you and your family!
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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