Tuesday, June 26, 2012

The Consequences of U.S. Government Expenditures Outpacing Revenue

One fact of little debate is the U.S. continues to spend at a rate far outpacing the amount of revenue it receives. The consequence of this level of spending is the U.S. government continues to take on a greater amount of debt each year. Further complicating this mismatch between revenue and expenditures is the level of "mandatory" expenditures is growing at a 7% rate according to the OMB. A recent report by Charles Schwab and Argus Research notes:
  • Government outlays soared from 20.1% of GDP in the last Bush term to 24.4% in 2009-12. Meanwhile, government receipts fell from 17.9% of GDP in the last Bush years to 15.3% in the Obama years.
  • Over half the drop in receipts has been due to lower payroll taxes.
  • After 2013, the Office of Management and Budget projects interest on publicly held debt will jump
    from 8.8% to 14.5% of total receipts.
  • OMB also projects that “mandatory” federal spending will rise at a 7% annual rate, from 2011 to 2017— as fast as it did in the past six years.
  • The deficit is expected to decline to 3% of GDP over time, but that is based on the assumption that individual and corporate income taxes rise by rates of 10% and 17%, respectively.
From The Blog of HORAN Capital Advisors

Wednesday, June 20, 2012

Investor Equity Fatigue

It is understandable that investors have developed fatigue when it comes to investing in stocks. As the below chart shows, since 2000, investors have essentially made no money in stocks. Compounding this is the fact that the return necessary to recover from the equity market declines is more than double the losses that have been incurred.

From The Blog of HORAN Capital Advisors

One outcome of the equity market volatility is investors have continued to allocate more of their investment dollars to fixed income/bond investments. Given the low level of interest rates though, a spike higher in rates can have a detrimental impact on ones bond portfolio. Many investors experienced this outcome in the first quarter this year.

From The Blog of HORAN Capital Advisors

At HORAN, we believe investors can still make money in stocks; however, a buy and hold strategy will not provide the best return outcome in this environment. Being more tactical and taking a little money off the table (taking some gains) when stocks run up is a necessity during these times.

Sunday, June 17, 2012

Where To Invest In The Coming Years

Richard Bernstein of Richard Bernstein Advisors and Bill Wilby, former manager of the Oppenheimer Global Fund discuss why the U.S. is the best place to invest in the coming years. For equity investments Bernstein's favorite asset class is small capitalization companies while Wilby is focusing on high quality large capitalization dividend payers.

Source: WealthTrack

The New Normal: Continued Volatility

A recent investment newsletter from PIMCO's Neel Kashkari, takes a look back at PIMCO's application of the "New Normal" comment for the global economy in the spring of 2009. "The New Normal called for long-term deleveraging that would lead to lower growth than society had been accustomed to." One outcome of this New Normal cycle has been an increase in market volatility.

A result of this heightened volatility is the fact investors have become skeptical of the equity markets. PIMCO notes:
  • "From May 2002 to May 2007, during the old normal, the S&P 500 experienced a 5% correction from a recent high five times, or on average of once per year, and a 10% correction four times."
  • "In the three New Normal years from May 2009 to May 2012, the S&P 500 experienced seven 5% corrections, more than twice as often, and a 10% correction three times."
This increased downside volatility is evidence investors should consider investment strategies that could limit the negative impact of downside market returns. Aside from sitting in cash, some of the strategies mentioned in the article include:
  • "Buying higher-quality companies and those with strong balance sheets, because they tend to be more resilient against shocks, according to our research."
  • "Buying companies at deep discounts to their intrinsic value."
  • "Buying companies offering more immediate return on investment through dividends."
  • "Actively hedging the portfolio, with tail risk hedging (which refers to taking a defensive position against extreme market shocks), or other means."
  • "Investing in multi-asset solutions that provide diversification and include equities, fixed income securities and commodities in one vehicle."
Lastly, investors and investment advisers have a choice between active and passive investment management. A potentially significant drawback of passive investment in the New Normal environment, i.e., more frequent market declines,  is investor returns will decline with the market. The S&P 500's near 40% decline in 2008 is evidence of this type of market action. For investors taking distributions from their accounts, returns like those incurred in 2008 can be more detrimental.

For investors that incorporate some downside protection in their investment strategy, this does not come without a price. Downside protection is likely to limit some of the returns achieved in an up market. However, outperforming in a down market can still result in outperformance and higher compound returns over a complete market cycle.


Three Years and Counting
By: Neel Kashkari
June 2012