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  • Investment Themes to Consider for the Remainder of 2015


    We contend that the market is poised for a strong finish this year (some of which we have seen already thus far in the beginning stages of the 4th quarter) following a volatile finish to the 3rd quarter. There is even some historical precedent for such strong calendar year finishes, regardless of the performance of the stock market during the month of September of the 3rd quarter overall. According to a MFS “By the Numbers” piece on September 8, 2015, over the course of the last 25 years, the S&P 500 index has gained more on a total return basis during the 4th quarter; which includes the months of October, November and December, of the year than the index has gained during the other 3 quarters – combined. Since 1990, the final 3 months of the year have gained +253.1% on a total return basis versus a gain of +181.3% for the first 9 months of the year. We believe that this trend will continue during the fourth quarter of 2015.

    With this in mind, we suggest the following portfolio management ideas for careful and thoughtful consideration for the remainder of 2015 remembering that any investment portfolio should be custom tailored to an investor’s specific financial goals, income needs, investment timeframe and tolerance for risk.

    • Maintain current overweight to the U.S. but continue to diversify across capitalizations

    While we contend that international stocks, particularly within Europe and also including certain emerging markets, are an attractive asset class for the intermediate-longer term, we expect better risk adjusted, relative performance potential over the near term in certain U.S. equity asset classes and sectors with a strong finish, and potential “Santa Claus” rally, to close out the year. However, investors would be wise to diversify across the U.S. mid-cap and the U.S. small cap asset classes as well as opposed to just concentrating on the U.S. large cap asset class.

    • Consider satellite allocations for diversification and growth potential

    In addition to their “core” holdings in global equities and fixed income, investors would be wise, in our view, to also consider adding “satellite” allocations to some less traditional areas such as Real Estate Investment Trusts (REITs), Energy, Biotech and the U.S. Dollar for diversification and growth potential in the months ahead.

    With respect to REITs, 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 Federal Reserve would not consider raising interest rates unless they believed that the U.S. economy was on a firm footing and expanding moderately well.

    With respect to the U.S. Dollar, in our view, the U.S. Dollar can only get stronger as the Federal Reserve embarks upon a rising interest rate cycle (likely commencing finally in December) while other central banks across the globe either lower their own respective interest rates or keep them at low levels for the foreseeable future until their own economic growth targets are hit.

    • Bond strategies can be effective for income and growth-oriented portfolios

    It has long been our contention 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 rise, 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 should not expect to 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.

    • Look for attractive entry points for allocations to international equities

    Looking beyond 2015, both Europe and Japan, in addition to a few emerging market economies, are projected to grow their economies at a higher rate of annual growth while the U.S. is projected to experience lower annualized Gross Domestic Product (GDP) growth, which may lead to an increase in investor appetitive for allocations to these markets. We also believe that international stocks, specifically within Europe and also including certain emerging markets, are an attractive asset class for risk-adjusted return potential over the intermediate-longer term. As a result, any additional pullbacks in international equity strategies, European-based strategies in particular (perhaps sparked by renewed fears within one of the P.I.I.G.S. countries), may present an attractive entry point, or re-entry point, for some investors.

    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.

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