By Diane Harrison
In the world of investment management, 2015 will arrive with little fanfare but perhaps more trepidation than usual. Advisors will consider a myriad of factors, both economic and not, which weigh on their overall investment decisions. The variables are many, and the impact on individual portfolios more so. How to navigate through the financial jungle facing their clients?
In the U.S., the midterm elections will largely dictate the course of the remaining years of the current presidential term. This course also plays a major role in the future direction and relative strength of the US markets, which subsequently impact advisors’ decision-making for client portfolios. The interplay between these three areas justifies a closer look at how their relationship correlates to the process of investment management. Perhaps a short overview of each will provide some preliminary direction to advisors looking to forge an investment path to 2015.
THE ELECTION SPELLS A LACK OF MANDATED ACTION
One of the major concerns shared by both parties heading into the last two years of the current presidential term is that 2015 will likely present a governmental body without a strong mandate for action.
USAToday published an opinion piece by Texas senator Ted Cruz in October that essentially summarized the “Big Three” factors that he, and many others, believes need fixing in the U.S.: jumpstart the economy, safeguard constitutional liberties, and strengthen national security.
Summarizing the top ten fixes addressed in the article were the following issues:
- Embrace a big pro-jobs, growth agenda.
- Pursue all means possible to repeal Obamacare.
- Secure the border and stop illegal amnesty.
- Hold government accountable and rein in judicial activism.
- Stop the culture of corruption.
- Pass fundamental tax reform, making taxes flatter, simpler, and fairer.
- Audit the Federal Reserve.
- Pass a strong balanced budget amendment.
- Repeal the Common Core education requirement.
- Deal seriously with the twin threats of ISIL and a nuclear Iran.
Cruz emphasized that Americans need to pass a serious agenda to address the real priorities of the people by protecting constitutional rights and pulling back from the fiscal and economic cliff the country now faces. Investment advisors will want to keep an eye on the issues above and how they are, or are not, addressed by the government in the near term.
THE STOCK MARKET: BELIEVABLE OR INCONCEIVABLE?
There isn’t an investment advisor working today who doesn’t have a strong opinion on the health of the US markets. While the metrics to evaluate and analyze the markets are vast, most professionals consider a company’s price to earnings (P/E) ratio as an important factor in this evaluation process.
A white paper published in the middle of 2014 by True Point Wealth, Is the U.S. Stock Market Overvalued … and Does it Matter? presented some interesting data points regarding both the evaluation measurements and the mindset of today’s investors:
… a drawback to using the trailing P/E ratio is that by definition it is backward looking. Additionally, short-term reported earnings can be distorted by the inclusion of one-time, extraordinary items. This was exemplified during the recent financial crisis when many companies chose to accelerate large write-downs, driving reported earnings so low that a record high 120 P/E was registered near the S&P’s price bottom.
A study published by the Financial Analysts Journal showed that equity ownership as a percent of an average institutional portfolio peaked at around 64% in 1968 and again in 1999 and has been on a decline since. The report speculates that investors remain wary of the market because they have yet to shake off the memories of the past two major market declines. Despite a five year bull market run that has driven the S&P 500 to new highs, investors don’t appear overly excited.
So companies’ P/E multiples don’t appear to offer much in the way of a diagnostic tool for future value, and investors are still fearful of committing their capital to the future build out of these companies’ growth. The combination of these two factors make an advisor’s job harder both to invest client money where it has the best opportunity to work for growth as well as to satisfy the client’s desire for peace of mind.
ANALYSIS PARALYSIS CAN SABOTAGE THE BEST-LAID ASSET EVALUATION
Each year, JPMorgan’s Capital Market Assumptions Committee, a team of senior investors from across the firm, gathers input from their global network of portfolio managers and product specialists to produce their annual assessment of the long-term outlook for all major asset classes and markets. JPMorgan describes these assumptions as being used widely by institutional investors—including pension plans, insurance companies, endowments and foundations — to ensure that investment policies and decisions are based on real-world, consistent views, and can be tested under a variety of market scenarios.
Some global themes for 2015 from JPMorgan’s Long-term Capital Market Return Assumptions report are paraphrased here:
- Whether the already somewhat long-lasting expansion might be approaching its end, even before monetary policy has normalized.
- The expansion, at least in the developed world, remains in its early-to-middle stages and likely has considerable room to run.
- In longer-term rebalancing dynamics, what pressure points remain that may pose problems for sustainable growth down the road.
- Much progress has been made in narrowing current account gaps, but that debt stock rebalancing within economies has not proceeded as far, particularly in public sector debt burdens associated with recession-era stimulus.
- The pressure for further adjustment in sovereign debt levels may resume at some point, probably from fixed income investors, given signs of austerity fatigue among electorates.
- Resumption of global fiscal tightening might not be met with more expansionary behavior by households and firms, denting aggregate demand growth in high-debt economies. Such a day of reckoning probably lies a few years down the road.
The political, economic and global themes summarized here will form the backdrop against which 2015’s markets will play out. Whether these themes tend to cloud advisors’ investment decisions or shed new light on directional allocations remains to be seen. Regardless, these issues are likely to drive market activity for the next several years. Advisors will need to keep an eye on these and other market developments as they focus on portfolio allocations and investment management for their clients.
Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 20 years’ of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. Panegyric Marketing received consecutive year awards in 2013-14 as IHFA’s Innovative Marketing Firm of the Year and AI’s Marketing Communications Firm of the Year- US. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line.