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Happy New Year! If, back in early March with the Dow Jones Industrial Average, hovering around 6,500, you were told that we would end the year with this index above 10,000 you would have thought that they were crazy. However, we did and here we are now beginning a new year and, in fact, a new decade. With this in mind, and in a similar fashion to our “Nine for 2009” column which appeared in The Record in early January, 2009 we pen our “Ten for 2010” which appears below. Please note that these ideas are not in any particular order.
Theme number one – interest rates will go up. Not through the roof but enough to impinge bond returns for investors with longer term portfolios. It is never wise to go “all in” with a particular investment or investment outlook. Fixed income investors should favor short to intermediate term bonds versus those with longer-dated maturities as well as corporate issues versus those issued by the U.S. Government. We believe there is still value in the corporate sector and relative safety, in the sense that a rising interest rate environment is lethal to long bonds but dramatically less so to shorter term debt.
Theme number two – boring is back. . Calendar year 2009 was one filled with chaos, panic, rally, greed and finally solid gains for all of the major averages. The place to be as 2009 wound down was in the more aggressive and economically sensitive areas. The large-cap, blue chip, conservative areas of the equity market, having more successfully “ridden out” 2008 lagged. Companies like Pepsi, Johnson & Johnson, Proctor and Gamble and McDonalds endowed investors with dividends and a level of comfort but not the rock ‘em-sock ‘em returns of their smaller, more economically sensitive counterparts. We believe that calendar year 2010 will be a better year for the more staid, conservative issues.
Theme number three – international equities keep rolling along. It is easy to focus on the United States as, by any measure, it is by far, the world’s largest equity market as well as economy. The majority of assets that we manage at Fagan Associates that are invested in equities are invested in U.S. Companies and mutual funds that invest in U.S. Companies. That said, investors need to incorporate some international exposure into their asset allocation model as emerging markets are most likely to be the best performing as we move forward. These markets are also likely to be the most volatile, unpredictable and vulnerable to geopolitical shocks as well. Specifically, investors might consider BLDRs Emerging Markets 50 Index (symbol ADRE), the Harding Loevner Emerging Markets Fund (HLEMX) and our largest international holding, the William Blair International Growth Fund (WBIGX).
Theme number four – variety is the “spice of life” when it comes to bonds. Despite our cautious posture outlined in our first investment theme, fixed income investors must understand the consequences of movements in interest rate and adjust their portfolios accordingly. That said, on one hand, there is no guarantee that rates will go up in 2010 and that we will see inflation. However, on the other hand, with short-term interest rates near zero and the slope of the yield curve very steep on an historical basic, from these levels, how much lower can rates really go. Interest rates may linger in this area but lower really is not an option. For this reason, we are using funds with short-intermediate maturities such as the Payden GNMA Fund (symbol PYGNX) and PIMCO Total Return Fund (symbol PTTDX) as cornerstone fixed-income investments. Mixed in with these are the Loomis Sayles Bond Fund (symbol LSBDX), a strategic bond fund that delivered a 25%-plus return in 2009 after a dismal 2008. Investors should also consider the Oppenheimer International Bond Fund (symbol OIBAX), a solid fund. However, the U.S. dollar has recently shown some signs of strength, so keep this five-star star fund on a short leash.
Theme number five – opportunities will present themselves. The stock market ended 2009 on a bull run, moving more than sixty percent off its early March lows, without even one ten percent correction. For 2010, we envision some pullbacks that may offer buying opportunities. Nobody knows the catalyst for such a move, but reasons include terrorism, a flare-up of hostilities in the Middle East or just some good old fashioned profit taking.
Theme number five – consider dividend paying stocks. As noted above, many U.S. companies with solid balance sheets and attractive dividends were overlooked during 2009. Six companies that merit a look include Intel (3.1% dividend), Honeywell (3.1%), Johnson & Johnson (3.0%), ConocoPhillips (3.9%), First Niagara Financial (4.0%) and Yum Brands (2.4%). With CD rates hovering near one percent and with those investors experiencing “renewal sticker shock” as their CDs mature, these six could continue to be attractive alternatives to those investors seeking income. Please note that stocks inherently contain more risk than fixed-income investments, but dividends tend to cushion that volatility.
Theme number six – maintain an even keel. Historically it pays to sit back and take a deep breath when stocks are falling and to perhaps skim a little off the top when, like now, stocks are rallying. It is at these inflection points that an investor is most likely to make a mistake. Giddiness in the face of exuberant returns leads investors to take undue risk while pessimism and despair in the face of market turmoil leaves investors underinvested in equities. Balance and control in life as well as investing keeps you on the right track. Everything in moderation.
Theme number seven – cash is no longer king. A looming bubble in cash, money markets and Certficates of Deposit looms. We have started to see this bubble bursting with the maturation of CDs, U.S. Treasuries and with money market rates at historic lows. This will continue through early 2010 as the Fed will be very reluctant to raise rates, fearful that by so doing might choke off this fledgling recovery. These low rates will provide a floor of sorts to the stock market. While we believe that the market is vulnerable to a geopolitical event, it also has a ready supply of investors who are disenchanted with the low rates.
Theme number eight – invest in Treasury Inflation Protected Securities (TIPS) as a hedge against inflation. Despite the negative connotation, we believe that Inflation is like rain, some is good as it creates demand for goods and services. However, too much is bad as prices of those goods and services tend to appreciate faster than our incomes, thereby destroying purchasing power. We believe that 2010 will be accompanied by a little inflation and therefore recommend either the iShares Barclays TIPS Bond (symbol TIP), an ETF that invests primarily in inflation-protected bonds or the Vanguard Inflation Protected Securities Fund (symbol VIPSX).
Theme number nine – the stock market will outperform cash and bonds. No, during 2010 investors most likely will not get the rip-roaring twenty-some percent that they garnered during 2009. However, should, as we believe, interest trend up a bit pushing the value of bonds a bit lower, there should be enough good corporate and economic news to provide stocks with a bit of an advantage versus bonds.
Theme number ten – continue to “barbell” your stock investments. As noted above, we like the more mature companies, but believe in moderation. Therefore, we would suggest that investors invest in those companies on one side and complement or barbell them with some growth companies including Apple Computer, Cisco Systems, Oracle, Intel, Mosaic and some BioTech stocks.
Best wishes for a Happy, Healthy and Profitable 2010!