So where does this leave Camarda’s investment thesis? Let’s summarize our outlook:
- The US economy is in overdrive, but the Fed is actively trying to cool it, and rising rates and other drags will eventually tip it into recession, but not for a period measured in years not months.
- The stock market tends to be a leading indicator. It goes up before the economy really gets moving, and goes down before the economy falters.
- On average US stock values are widely viewed as overpriced – stock earnings power doesn’t justify share prices.
- The US economy is increasingly the economic engine of the world. Recent trade and tax policy should on the whole propel profits, and offset – at least for a time – the drag of higher interest rates and higher goods costs from tariffs and a strong dollar.
- Interest rates are going up. While we still think bonds are a bad place to be – a belief we’ve held for years now – this will change as yields become attractive again, which we expect in late 2019 or in 2020.
- Non-US economies and stock markets are still well behind the US curve. This will eventually change as the US enters recession and a stock market correction, and other bright spots appear around the globe.
This outlook shapes our investment strategy. For the next year or two, here are the strategic principles we will use to shape our portfolios:
- US stocks should still make up a majority of equity allocations, but dividend-paying value stocks should be favored. While US stocks are widely overvalued, there remain many value opportunities where quality companies reflect real bargains. Not only do such stocks represent strong upside, but they should also provide a strong cushion against a correction or bear market, since their prices don’t need to be deflated to reflect fair value. In addition, stocks with decent dividend yields provide more protection, since they should return cash steadily regardless of market levels.
- Non-US stocks should represent significant equity allocations, with established economies like Europe and Japan overweight relative to emerging economies like China and South America. Foreign markets did very well in 2017, but have suffered in 2018 due to trade war and currency exchange issues. While they are far enough behind the US curve because of this that we might like to shift some allocation from non-US to US, we think values will be better in 2019 and would wait until next year to consider this.
- It’s still early for bonds, but yields are finally getting more attractive. Since bond prices go down when rates go up, we will avoid mid and longer term bonds for awhile yet, perhaps until 2021. Still, yields are off the floor, and we think it’s finally time to wade in and buy shorter term issues to pick up some yield while we wait for longer bonds to drop some more. Once they do, we plan to shift the more conservative portions of our allocations into longer issues with juicier yields at 5%+.
