Amid Gloom, A Rocket Shot….Mid Year 2016 Investment Report

by | Jul 25, 2016


After an initial shock resulting from the news of the UK’s vote to exit the European Union on June 23rd, financial markets have rebounded sharply in recent days as global investors saw fears of European disruption as overstated. Stock indexes in the US are at or near their previous highest levels last seen in May of 2015. These recent developments have increased the value of our accounts and in general enhanced our investment results.

Throughout this year, economic indicators have been suggesting a slowing global economy, which has caused many investors to continue to sell stocks and rush into purchasing all manner of bonds, elevating bond prices to levels not seen before. Some foreign central banks such as those in Switzerland and Japan have instituted negative interest rates (where investors must pay interest to own the bond), signaling slow growth expectations and fears of recession. Meanwhile, the US Federal Reserve has again put off any immediate plans to raise short term interest rates.

Recent economic indicators however, are beginning to suggest an improving global and domestic outlook. Business conditions reports from Western Europe and China are showing distinct improvement. Here in the US, employment gains have resumed after two months of little job growth in April and May. June employment results were quite strong, showing an addition of 287,000 jobs. Unemployment is at a low level, but many workers are still earning rather low wages and others still cannot find steady, quality employment. Overall, the state of the US labor market remains mostly favorable.

Real estate prices in many key US locations are quite strong, which is generally a good sign. House and condo prices are now out of reach for many prospective buyers in several US metro areas, which could be a problem for real estate values later on.

Corporate profits and revenues are still not showing any gains in recent quarters, stemming from slow demand for heavy machinery, low commodities and energy prices as well as a strong US Dollar, but those pressures have eased in recent months. Heavy Industry growth, especially energy and mining, has been very slow and showing outright contraction in some sectors, and has been a cause for ongoing concern. The recent rally in stock prices however, may signal that markets are sensing a bottom in corporate earnings  and gains for global economic activity for the coming year.

Our portfolios are doing fairly well this year, but as always, there are several hazards ahead. The Presidential election is still a wild card. The economic direction of China, Europe and Japan, all of which are still at risk of slowing economic growth or even outright recession. In a globalized world, international troubles become our own.

Our holdings contain substantial cash reserves as part of our Dividend Power® investment plan. We are already well invested in a high quality diversified portfolio, but if financial asset prices again decline in the coming months to levels that are attractive and investable, (around 10%+ lower than current prices) additions of Blue Chip dividend paying and growth assets may be added. Several high-grade investments in Aerospace, Pharmaceuticals, Cyclical Capital Goods, (heavy industrial machinery)  and Biotech are among the categories that may offer substantial opportunity.

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