Ferri: Expected Investment Shifts In 2015

January 05, 2015

 

I make investment changes at a glacial speed. The last change was about five years ago when I combined micro-cap stocks with small-cap value stocks to reduce the number of funds in the portfolio. Before that, I eliminated a preferred stock allocation, which was fortunately done right before the financial crisis. Over the coming year, I believe the opportunity may present itself for another change.

 

Currently, 70 percent of my stock allocation is in U.S. equity and 100 percent of my bond allocation is in U.S. bonds. Sometime in 2015, I may shift my portfolio to a more global stock and bond allocation.

 

I can’t say exactly when this will occur. I don’t expect it to be in the near future because certain events have not fully unfolded, but they’re getting close. The U.S. led the world out of a deep global financial crisis that started seven years ago. Bold moves by U.S. Federal Reserve members and government leaders provided the firepower needed to pull the country back from the brink of a depression.

 

Interest rates were pushed very low, money became abundant through quantitative easing, debts were restructured, the national debt declined, incomes started rising, growth rebounded, unemployment dropped, and inflation was amazingly tame throughout. Many of the moves were unpopular, such as bailing out too-big-to-fail financial institutions, but they worked, and the U.S. led the world out of a bad situation.

 

More And Better QE

Unfortunately, the rest of the world didn’t follow very well. Central banks and governments did not provide enough economic stimulus, debts did not decline as quickly, incomes did not advance much, and unemployment remained stubbornly high in some regions. This caused local currency values to decline, and some regions slipped right back into a recession.

 

Equity markets were the great equalizer of all that occurred. Figure 1 shows how different the outcome was in U.S. stocks versus international stocks since 2009. Shown are the growth of $10,000 in total return in the Vanguard US Total Stock Market ETF (VTI | A-100) and the Vanguard FTSE All-World ex-US ETF (VEU | B-98) for five years ending Nov. 30, 2014.

 

Figure 1: Vanguard US Total Stock Market ETF versus Vanguard FTSE All-World ex-US ETF

Source: © The Vanguard Group Inc., used with permission.

 

Only now are countries and regions such as Japan and the European Union (EU) making the hard choice to restimulate their economies through aggressive actions. Japan, EU and even China are pushing interest rates lower and boosting the money supply through central bank purchases of assets. It’s essentially what they did during the financial crisis, but they took their foot off the pedal too early.

 

You may be asking, why should stimulus work this time since it has been done before and didn’t work? In my opinion, the difference this time is a steep drop in commodity prices, particularly the price of oil. A 50 percent drop in petroleum has provided a much needed shot in the arm to energy-importing countries and regions, including Japan, Eastern Europe, China, India, etc.

 

It’s this huge dividend that makes the difference.

 

Those countries paying the dividend aren’t happy though. Commodity-exporting countries such as Brazil, Russia and Venezuela have seen their currencies shrivel, debt prices collapse and a loss of investment capital from all sources. This has had a crushing effect on their stock markets.

 

 

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