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Coffee with Whitnell’s Chief Investment Officer January 20, 2015
U.S. GDP growth has been picking up, but some commentators are worried that inflation may be too low with the impact of lower oil prices and the drop in the consumer price index for December.
Really? After the 50% decline in crude since last July, real oil prices are now selling near their long-term average. The decline in the price of oil is obviously a negative for some countries, producers and selected companies, but it is a boost to global growth and there is no real deflationary threat for the U.S. Global growth is anemic, but the economy in the U.S. continues to be relatively strong – with GDP growth probably close to 3.5% annually. The long term trend is for further growth and eventually higher inflation, not deflation.
Growth, inflation and the euro remain weak in the Eurozone. How do you view the risk of contagion?
Global economic growth rates are being revised downward and Christine Lagarde, managing director of the IMF, has said that too many countries are still weighted down by the after-effects of the financial crisis and excessive debt. Even with a resurgence in U.S. growth and lower oil prices, much of the global economy remains in its slump. After more than two years of becoming head of the European Central Bank, Mario Draghi is finally getting very close to resolving the political and legal constraints that have delayed his undertaking a massive quantitative easing program. He is now close to adding a trillion euros to the ECB balance sheet, with the expectation that providing this liquidity will boost growth and shore up confidence. Nonetheless, markets remain skeptical. For now it looks like the Euro will live to see another day.
Now that the Fed has ended its quantitative easing program when do you expect interest rates to rise?
Whatever the Fed does with the federal funds rate, interest rates will rise coincident with a stronger U.S. economy. That will be a positive for the investment environment after six years of financial repression and numerous phases of quantitative easing. Employment growth has been positive, but the Fed remains concerned that the labor force participation rate and wage growth have been declining. It is expected that with the target inflation rate still below 2.0% the Fed will delay a rate increase for some months.
Geopolitical concerns and terrorism acts have intensified. How do you factor those threats into the investment decision-making process?
These so-called exogenous threats are worrisome, heighten uncertainty and increase market volatility. Potential threats to global stability have always been with us, but they have now become more accentuated with the global expansion of the internet and social media. These developments are among the factors that go into the calculation of the risk-adjusted return we require for all investments, but their impact on the global economy historically has tended to be temporary.
For some time you have over-weighted equities, especially U. S. large-cap stocks and funds in your recommended asset allocation strategy. Are you giving consideration to changing that strategy now that the market has been so strong over the last six years with perhaps increasing prospects for a near-term correction?
Since the financial crisis the economy recovered and has continued to grow at modest rates in the expansion phase of the cycle. Common stocks have moved higher with the support of rising earnings and rising valuations. Continued strength in the economy and rising earnings can provide support for further gains in stock prices. Lower oil prices have put more money in the hands of consumers who contribute more than 70% of U.S. GDP. Pullbacks or corrections can occur at any time for any reason or no reason, but are not forecastable. While stock prices have moved ahead substantially, valuations are still within an average long-term range. Stocks still look relatively attractive to us and represent a major long-term commitment in our asset allocation for clients. We believe that portfolios of individual stocks and fund selections still offer attractive return potential, while maintaining a focus on valuations to minimize risk.
Any final thoughts?
As always, it’s critical that investors learn to accept volatility as normal, take advantage of investment opportunities that volatility presents and have a long-term view toward their investment portfolios. We wish all of our clients and other friends the best for 2015.
Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission.