Who can take a sunrise
Sprinkle it with dew
Cover it in chocolate
And a miracle or two
Janet Yellen
(The candy man)
Janet Yellen can
(The candy man can)
Janet Yellen can cause’ she
Mixes it with free cash and
Makes the world taste good

The stock market has rebounded from its February lows because of central banks and talk from Janet Yellen of delaying interest rate hikes.  Europe and Japan have gone further into negative interest rates and the Federal Reserve has halted interest rate increases here in the US.  If something isn’t working, the answer is not to continue doing what you are doing.  Investors are hooked on the “drug” of ever lower interest rates when it comes to the stock market, but the drug of abnormally low interest rates is not working on the “real” economy – five straight quarters of negative revenue growth for publicly traded companies, anemic growth in the US, Japan falling back into recession, exports around the world dropping by double digits on a year-over-year basis and the Baltic Dry Index (cost of shipping) below 2008-2009 lows.  As we have seen with each new quantitative easing program, its affect is less substantial and it lasts a shorter time.  We expect the same with this new round of easing.

What this means for your portfolio going forward?

When the economy is good it does not necessarily mean the market will be good and when the economy is bad it does not necessarily mean the market will be bad.  One of the best times to invest in the stock market was early 2009 – one of the worst times in US economic history.   Conversely, one of the worst times to invest in the stock market was at the beginning of 2000 when the economy was doing quite well.  When investing, one of the most important questions one needs to ask is “Do valuations accurately reflect current economic conditions?”  In 2009, even though the economy was bad, many stocks were priced at bankruptcy levels.  You also had many companies paying a higher dividend yield on its stock than the debt that those companies were issuing.  In 2000, even though the economy was good, many stocks (especially technology stocks) were priced at values much higher than economic growth warranted.  Today, we actually have both of these conditions present.  There are areas of the market where prices have fallen further than justified (emerging markets, energy, MLP’s, and BDC’s) and reflect a worse economic picture than is currently present (like 2009).  At the same time, US large companies seem oblivious to the current economic malaise and have held up well in the face of falling earnings (like 2000).  Though not as extreme as 2000, US large company valuations, in our opinion, are too high based on current economic conditions.  That is why our portfolios are overweight in the former areas and underweight in the latter areas.