Mar 312015

Though we’ve repeatedly heard market pundits talk about reaching all-time highs, the market has actually been bouncing sideways since mid-November – albeit at all-time highs. We have entered a grinding period in the market where we will discover if the economy has enough velocity to smoothly transition to a rising rate environment. Will corporate earnings growth continue to justify lofty price to earnings ratios? Or will the stronger dollar slow growth, perhaps even creating negative growth for the first quarter 2015? These questions have yet to be answered, and the push and pull of the debate on Wall Street is creating significant swings in the market.

I believe the economic numbers over the past few weeks, which suggest a slow growth environment coupled with asset price volatility, will continue for an extended period. So far, our strategies as outlined in the 2014 year end commentary have been working.

The U.S dollar has stayed strong: The dollar has stayed so strong in fact, this could be the black swan of 2015, doing significant damage to multinational company earnings and placing the Federal Reserve in a position where if they raise rates, they may push the United States back into a recession, as rising rates will further increase the value of the dollar.

The strong dollar created allocation changes for many clients. During the first quarter I sold all positions in Templeton Global. This was an unusual trade as the fund remains in the top 1% of its peers in global fixed income, but when considering the significant headwind of a stronger dollar, it appears it will be very difficult to make money on the exchange from foreign currency to the US dollar. This created a situation where I thought, in the best case clients would realize a 5% gain for 2015 and in the worst case they may lose 15%. The risk reward was out of balance. Though Templeton is a great fund which made a lot of money for us over the past 7 years, it was time to move on.

Healthcare continues to work: While the broad markets were even for the first quarter, the healthcare sector put in significant performance. Vanguard Health Care fund was up 9.64% and the average return on the health care properties owned by many clients was positive 3.12%.

Dividends matter: One of the simplest ways for companies to communicate financial well-being and shareholder value is to say “the dividend check is in the mail.” Dividends send a clear, powerful message about future prospects and performance. A company’s willingness and ability to pay steady dividends over time – and its power to increase them – provide good clues about its fundamentals. Profits on paper say one thing about a company’s prospects; profits that produce cash dividends say another thing entirely.

Dividends place a floor under individual stocks in declining markets and if over the next 10 years, we continue to grind sideways, many investors will find themselves earning no income over yet another lost decade.

One of the important questions I ask myself before every trade is, “how well is my client going to be compensated in dividends and income as they wait for the return of their investment?”

As we continue to grind through 2015, I expect the fear of an interest rate hike to paralyze the markets and create significant volatility. In this case, the fear of change will be much worse than the change itself. The real question to be determined is; during 2015, while facing a fearful market and a stronger dollar, will the Federal Reserve raise rates at all?

Around the office I often comment that the investment business is not an entertainment business. It’s easy to get sucked into chasing the hottest fad, attempting to make quick money and fast trades. In reality, a good investor is a stable investor who limits emotions and makes consistent, sound, conservative decisions, slowly and methodically working toward the accomplishment of long term goals. If done right, investing shouldn’t really be entertaining at all. With many significant changes on the horizon, the remainder of 2015 will be exciting, but the excitement will not change our long term strategy of investing in good companies who pay us income as we wait for return of our investment. Have a wonderful spring.


Michael R. Harding, CFP
President / Portfolio Manager