Balancing Short-term Gains with Long-term Growth Prospects02-18-2020 |
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 2/14/2020. Rates and Economic Calendar Data from Bloomberg as of 2/14/2020. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets enjoyed another week of strong performance, except for international developed market equities which moved sideways and ended the week down 0.02%. In the U.S., the S&P 500 Index advanced to a level of 3380, representing a gain of 1.65%, while the Russell Midcap Index increased 2.23% last week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, followed the lead of it’s larger U.S. counterparts ending the week 1.90% higher. As previously mentioned, international developed market equities floundered sideways, finishing the week just lower than flat. On the other hand, international emerging market equities gained 1.37% over the course of last week. Finally, the 10-year U.S. Treasury yield closed out the week at 1.59%, unchanged from the previous week’s close.
It’s no secret to stock investors that earnings drive long-term returns, but the expectation for what a company does with the cash it earns has changed over the last 30 years. Broadly speaking, a company has two options regarding what to do with any earnings (cash) generated during each fiscal quarter. The company can either reinvest its profits by acquiring other companies, investing in research and development, or investing in capital expenditures like new equipment. Conversely, companies can choose to return capital to shareholders through dividends or share buybacks. The former improves the company’s long-term growth prospects but deprives investors of immediate gains, whereas the latter satisfies the investor’s desire to realize gains over the shorter term but may limit the company’s future growth prospects.
The J.P. Morgan Asset Management chart below highlights the eveloution of this trend among S&P 500 companies over the last 30 years.
At Hennion & Walsh, we believe that appropriate balance in a stock portfolio is paramount to long-term success. In other words, we advocate for holding a balanced mix of not only asset classes but also of companies investing in projects expected to lead to future growth, as well as firms that are currently returning profits to investors through increased dividend issuance and share buybacks. Allowing the scale to tip too far in any direction has the potential to increase risk and reduce return potential. With that said, we encourage investors to stay disciplined and work with an experienced financial professional to help manage their portfolios through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
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.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.