The New Normal

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As we enjoy the fall weather and enter into the last quarter of 2016 it is useful to look back at where we have been this year and what insight recent events can provide us regarding the future.

Needless to say this has been anything but a normal year. We have witnessed the rise of the Zika virus, the destruction of Syria, the plummet in the price of oil, the Brexit vote of Great Britain, and the chaos of the American Presidential Election…just to name a few events.  And yet, the U.S. financial markets have continued to rise, with the S&P 500 increasing over 5% since the beginning of the year.  So what is accounting for this lack of response from the U.S. financial markets to this global pandemonium?

As other significant economic countries around the world, such as China, Brazil, Japan, or Germany, struggle to maintain sufficient growth, their Central Banks have attempted to spur economic growth by both printing money and lowering interest rates.   While these foreign central banks had hoped their actions would encourage individuals to borrow and spend, in many cases the result has been to inadvertently encouraged foreign investors to pour money into the American financial markets which are viewed as relatively safer and more stable than their global peers.  Additionally, the US Federal Reserve, under the leadership of Janet Yellen, has continued to signal its intent to raise interest rates modestly in the future.  By raising interest rates, the Federal Reserve is likely to strengthen the value of the dollar which increases the returns for foreign investors holding investments in dollars.    Essentially, rational individuals that would traditionally hold their money in bank accounts or foreign investments (that are currently earning little to no money from the lack of high interest rates) have been transitioning their money into U.S. equities in order to try and realize a higher return.  So where does this leave us?

Understanding that we are now within the second longest bull market in American history, with over seven years of continual growth, we believe that investment selection has become even more important.  In comparison to 2011-2013 when the economy was in an early stage growth cycle and investors were able to buy an index while still seeing substanal gains, this is no longer the case.  In particular, we see a need to focus on a few select areas of the market in the near-term.

  • Strong Dividend-Paying Stocks: We expect the Federal Reserve to raise interest rates one additional time this year and at least one time in 2017.  Forecasting for these few rises, however, interest rates will remain extremely low compared to the historic averages.  This will encourage investors to continue buying stocks that have healthy balance sheets and provide high yields by consistently increasing dividends, an action that is attractive to many who need additional income in retirement.
  • Real Estate Stocks: In September the Standard & Poor made real estate its eleventh sector in the S&P500 index. Previously real estate had been included within financials.  We believe that over time this new categorization will encourage many investors to increase the amount of capital they allocate to real estate as they may have been underweight in the sector when it was hidden within financials.  Additionally, REITs or real estate investment trusts pay high dividends, which will again attract income-oriented investors.  We would, however, be cautious with companies that have exposure to the commercial real estate, which seems to be overvalued.
  • Healthcare & Financial Stocks: We believe these are two sectors that will still be attractive in the future but should not be over weighted right now.  Although healthcare will continue to benefit from an aging population and financials will benefit from the eventual increases in interest rates, we believe that these two sectors are most vulnerable to near-term political upheaval after the elections in November.  In particular. banks and pharmaceutical companies have been the target of multiple campaigns throughout this election process.

Final thought

In these times of immense change when there is uncertainty about the future, both in society and in the financial markets, it is not uncommon for us to hear others cite this as the “new normal”.  The argument centers around the idea that the world we live in today is unlike that of the past and therefore we need to develop new rules and approaches.  At Glen Eagle, however, we believe that in these unique times, staying true to who you are and what you believe in is more important than ever.  And for us at Glen Eagle that means adapting to the market with a long-term perspective rather than reacting to the market with a short-term approach.

Wishing you a safe and prosperous fall.

Susan McGlory Michel & The Glen Eagle Investment Team

 

Disclosure: This commentary is furnished for the use of Glen Eagle Advisors, LLC, Glen Eagle Wealth, LLC and their clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary.