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  • 2015 Investment Ideas


    We believe that the U.S. stock market will continue to build upon its secular bull market rally in 2015, and post a positive return, potentially even in the high single digit range, for the year, though there will likely be several more periods of short-term volatility over the course of 2015, similar to what we have seen thus far in January.   As a result, we suggest the following portfolio management ideas for careful and thoughtful consideration for the New Year remembering that any investment portfolio should be custom tailored to an investor’s specific financial goals, income needs, investment time frame and tolerance for risk.

    Maintain overweight to the U.S.

    The U.S. appears to be positioned for the most upside potential in 2015, especially during the first half of the year, in comparison to other developed and emerging market countries for the following reasons:

    • Our contention that we are in the midst of a secular bull market and any intermittent market pullbacks may help to fuel the next leg(s) of this bull market cycle.
    • The U.S. economy currently resides as the “shiny city on top of the global economic hill” and should continue to generate a majority of capital inflows.
    • Europe appears to be struggling with how best to navigate out of their own economic recession and it may take longer for Europe to show consistent signs of economic growth than many originally forecasted though we still believe that international stocks (particularly within Europe and also including certain emerging markets) are an attractive asset class for the intermediate term, however, we expect better risk adjusted, relative performance potential over the near term in certain U.S. equity asset classes and sectors.

    Consider Asset Classes and Sectors that have Historically Benefited from Improving Economic Conditions accompanied by Rising Interest Rate Environments

    We believe it is an appropriate time to consider making adjustments to investment portfolios to brace for the reality that interest rates will inevitably start rising, though yields may rise before any such interest rate increases if investors continue to increase allocations to bonds and thereby push up their prices.  Recognizing that past performance is not a guarantee of future results, according to research report from Capital Innovations entitled, “Most Bonds and Some Stocks Could Suffer from an Increase in Long-Term Rates”, areas such as senior loans/floating rate notes, convertible securities, high yield fixed income and certain sectors of common stocks; such as Materials, Information Technology, Energy, Consumer Discretionary and Industrials, have generally benefited historically from rising interest rate market environments (measured for these purposes as the price impact of a 1% increase in 10-Year U.S. Treasury rates) during the timeframe of 1994 – 2013.

    We also conducted our own research to observe which sectors performed best when the Federal Reserve embarked upon their last measured rate increase program during the years of 2004 – 2006, which we contend is the likely blueprint they will follow this time around.  As you may recall, during this timeframe, the Fed raise the Federal Funds Target Rate by 25 Basis Points (i.e. 0.25%) on seventeen different occasions.  Our research interestingly showed that the top performing sectors of the stock market during this time period were Energy, Utilities, Telecommunication Services, Financials (led by REITs), Materials and Industrials.

    REITs Should Continue to Perform

    Many have been leery to increase allocations to Real Estate Investment Trusts (REITs) due to fears over the impact of rising interest rates on the housing market and mortgage REITs in particular.   To this end, it is important to recognize that REITs are not just related to the housing market and all REITs are not Mortgage REITs.  In fact, the largest component of the REITs market is not associated with Mortgage REITs, but rather is associated with Retail REITs.  Other sectors of the REIT market include diversified REITs, industrial REITs, hotel and resort REITs, office REITs, residential REITs, health care REITs and specialized REITs (including self-storage facilities).  Certain REIT sub-industries appear to be positioned well to perform in a rising rate environment for the next few years under the presumption that the Fed would not consider raising interest rates unless they believed that the U.S. economy was on a firm footing and expanding moderately well, even if the housing market is not growing as rapidly.

    Additionally, REITs have demonstrated that they have performed well during previous periods where the Fed has gradually raised interest rates.   For example, during the previously discussed timeframe of 2004-2006, the Fed raised the Federal Funds Target Rate on 17 different occasions in 25 basis point (0.25%) increments, U.S. publicly traded REITs, as measured by the Wilshire REIT Index, experienced an average annual total return of 27.7%.

    Year # of Fed Fund Rate Increases Wilshire REIT Index Total Return %
    2004 5 33.2%
    2005 8 13.8%
    2006 4 36.0%


    Data Source: Wells Fargo Advisors. Past performance is not an indication of future results. You cannot invest directly in an index.  The Wilshire REIT Index measures U.S. publicly traded Real Estate Investment Trusts. The Wilshire U.S. REIT Index (WILREIT) is a subset of the Wilshire U.S. Real Estate Securities Index (WILRESI).

    Remember that Bonds can be Effective for Income and Growth-oriented Portfolios

    It has long been our contention at Hennion & Walsh that, for income-oriented investors, bonds can provide for a dependable and consistent stream of income, and principal protection when held to maturity.   Bonds, whether they are Municipal, Government or Corporate bonds, can also provide for compounded growth opportunities when the income received from the bonds is reinvested.

    Additionally, for growth-oriented investors, fixed income securities can provide investors with downside protection and diversification within a growth portfolio, especially in a highly volatile market where additional, measured, short-term flights to quality are likely.

    In our view, investors should be careful not to miss out on the income and diversification opportunities offered by bonds by trying to time future, potential changes in interest rates.  History has shown us that trying to time the market, or time interest rate increases or decreases, is often an exercise in futility.   With this said, it is important to understand that when interest rates do increase, bond prices may fall and yields may rise.  However, rising interest rates should not impact the interest that bond holders receive on their bond holdings nor should they change the ability of these investors to receive par value on their bond holdings at maturity. Bond fund investors, on the other hand, may see the interest they receive on their fund holdings change in a rising rate environment and will not receive par value at maturity as there generally is no set maturity on bond funds.

    While allocations to bonds may vary based upon market conditions and investor objectives and risk appetites, certain types of bonds, from certain types of issuers, can still find a home in most investment portfolios throughout most market cycles.

    Disclosure:  Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.  This posting is provided for informational purposes and is not a solicitation to buy or sell any of the investment strategies or companies discussed.

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