The current election season has been filled with a cross-current of emotion. Anti-Wall Street, protectionist and populist campaigns appear to be the overwhelming themes in trying to persuade the electorate. Additionally, there has been significant friction between the public and private sectors as we are “seeing a tidal wave of corporate merger rejections.” Blaming business and globalization has been the topic du jour. While it would be helpful if the government played its usual supportive role in being a contributor (rather than detractor) to economic growth, the prevailing view seems to be that “industry” is the culprit of any economic ills. A battle between nationalism and globalization has also been sparked as there is continued debate on closing our borders. For the time being, the talk about the increasing need for more taxes, rules and regulations will not subside.
While those in charge of the U.S. fiscal situation may be myopic, I do not believe that is the case with Janet Yellen on the monetary side. As Dave Rosenberg says, “whenever a central banker is uncertain, rest assured that the only certainty is that he or she does nothing.” It may be a moment for Janet Yellen to delay another rate hike, as she becomes increasingly concerned with the harm the strong dollar can inflict on the rest of the world.
If inflation is considered a much lesser evil to the Fed than sacrificing full domestic employment and global growth, chances appear high that long-term bonds will finally break their multi-decade bull run. Also, think of all the proceeds the Chinese have recycled into our government bond market since they began fulfilling our appetite for cheap goods. For years, China was purchasing our bonds regardless of yield or return. Without this steady significant source of demand coupled with global growth improving, long-term bonds are quickly going to lose their luster. Even performing an attribution analysis on well-known bond fund managers’ recent outperformance, much of the alpha generated is not from investing in their asset class. These “unconstrained” bond funds reflect the style drift that some bond managers have had to undertake, as the alpha has been generated idiosyncratically from equity related investments. Outside of this style drift, a bond manager may be hard pressed to generate any positive return.
I do believe that a weaker dollar environment will stimulate inflation and global growth. As financial gravity inevitably returns in the form of higher normalizing interest rates, I do not expect a continued liquidation of stocks into bonds. In fact, the reverse will occur. Moreover, the highest levels of short interest since March 2009 in the present U.S. equity markets may also provide future equity demand (i.e. forced covering) and thus an unexpected tailwind for stocks. The focus will then be on the accumulation of US multinationals, which uniquely have the ability to maintain pricing power. More value-oriented equities will supplant momentum stocks as a rewarding and less volatile investment strategy. Multinational stocks, which are soft-dollar proxies, have lagged momentum stocks over the past two years. As the Fed is worried about global growth and financial market instability, multinationals will be a beneficiary of higher global growth (specifically affecting emerging markets and China recovering its moxie). I do expect earnings visibility to improve and a recovery in valuations relative to their domestic peers. While this may not be the consensus view, per William James, “The art of being wise is the art of knowing what to overlook.”
The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower or its affiliates. This is not an offer to buy or sell securities, and HighTower shall not in any way be liable for claims related to this writing, and makes no expressed or implied representations or warranties as to its accuracy or completeness.
Pamela Rosenau, Managing Director and Chief Equity Market Strategist at HighTower and Chief Investment Officer at the Rosenau Group has over 30 years of experience in the financial industry. Ms. Rosenau was recently ranked #75 in Barron’s 2015 Top 100 Independent Advisors and ranked #13 in Barron's 2015 Top 100 Women Financial Advisors. She was also chosen for Barron's 2016 Top 1,200 Advisors list, ranking #42 out of all financial advisors in California. Ms. Rosenau holds series 7, 63, and 65 licenses.
