I hope you had a wonderful weekend! Welcome to National Drive-Thru Day! You may have a hard time believing that some of these days exist. I invite you to click on the link to see what this one is all about.
LRPC’s Monday Morning Minute for this week, “5 Top Questions (And Answers) About Investing In The Second Half Of 2017” (presented below) comes to you courtesy of American Funds. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share enlightening, useful information with you each week.
What can we expect in the markets the second half of this year? That’s a question I hear a lot lately. Check out the piece below from American Funds to learn what their experts think.
Have a wonderful week!
5 Top Questions (And Answers) About Investing In The Second Half Of 2017
From American Funds
1. Europe’s economy has been struggling for years. Why should I invest overseas?
Europe’s economic recovery has been stubbornly slow, but there are reassuring signs that growth may be finally returning to Europe after nearly a decade of fits and starts. In fact, the European Union recently raised its 2017 economic growth forecast, saying the bloc’s revival is strengthening. Gross domestic product in the 19-country European Monetary Union is expected to grow by 1.7% in 2017 — still modest but improving.
Also, some of the political risks in Europe seem to be ebbing. Emmanuel Macron’s presidential victory in France on a business-friendly and pro-EU platform lifted sentiment, and centrist politicians across Europe appear to be beating back a populist backlash against the EU.
Still, Europe faces risks, including high unemployment in some countries and ongoing uncertainties over the United Kingdom’s decision to leave the EU. Those issues, however, have also restrained the share price of some companies, and valuations of select companies in Europe appear relatively attractive. Indeed, the economy and companies are likely to benefit from a weaker U.S. dollar, continued central bank stimulus measures and ultra-low interest rates, all of which could provide a favorable environment for economic growth and potential reward for investors.
2. Emerging markets have surged. Do they still have room to run?
For the first few months of 2016, emerging markets, and most others were restrained by concerns about Fed rates hikes, U.S. dollar strength, commodity prices, and the risk that China might drag the global economy into recession.
But since the “growth scare” early in 2016, emerging market stocks and bonds have surged. Now, with a background of improving global growth and potentially higher export volumes, the rally may have room to run. Brazil and Russia, for example, are expanding after two years of contraction. China remains a critical component of the growth outlook. Government stimulus appears to have steadied growth in China, and its likely policymakers will do whatever it takes to meet official growth targets ahead of China’s leadership transition in October.
While it sometimes seems that emerging markets are hostages to forces beyond their control, many have taken steps toward greater self-sufficiency. Indeed, the advances in some developing countries are also the result of improved fundamental strength — including stronger manufacturing, industrial production, and improved earnings growth. Also, the political and financial systems in many developing countries have come of age during the past two decades.
Uncertainties will persist, but many developing countries are fully integrated into the global market, have burgeoning middle classes and a rising standard of living. Despite the recent run-up in emerging markets, valuations remain relatively attractive compared to some developed markets. From low-cost producers in the mining space to Indian banks and innovative Asian technology firms, select companies continue to present an opportunity to invest in the evolution of emerging markets.
3. U.S. markets seem pricey. Are these levels sustainable?
The U.S. market may seem a little pricey to some investors, especially after the three major U.S. equity indexes hit all-time highs earlier this year. Granted, the valuations in some areas of the market may be stretched, making research and selectivity crucial to investing in companies with the potential to reward investors. But, more broadly, the underlying economic conditions in the U.S. are becoming increasingly supportive of equity investing.
Higher valuations can be justified by a number of factors, including economic tailwinds. Although still not in high gear, the U.S. economy is improving. So far this year, employment and manufacturing data have been relatively strong. Business and consumer confidence measures also have been high. In addition, corporate profits, which came under pressure in 2015 and 2016, have rebounded, surging more than 9% in the first quarter.
On the policy front, the easing of regulations by the new administration, combined with prospective tax reform and stimulative spending on infrastructure, could provide a further boost to growth. That said, policy remains fluid and any missteps with regard to trade policy could have an adverse impact on the overall economy.
The U.S. economy has proven to be resilient, but investors should remain mindful that we are in a volatile and sometimes unsettling period. While the macroeconomic and geopolitical issues are likely to make the investment environment challenging, the U.S. market continues to provide opportunities to invest at relatively attractive valuations in companies we believe have the potential to prosper over the long run.
4. Interest rates are rising. Do bonds still make sense?
Don’t bail on bonds. While it is true that rising interest rates can hurt some bond prices in the near term, bonds should continue to play an important role in a diversified portfolio. Bonds can help mitigate volatility, preserve capital and supply the investor with either current income or a relatively certain amount at some point in the future.
And even though the Federal Reserve has embarked on what is expected to be a series of gradual interest rate hikes, the new direction seems to indicate the Fed is confident about the U.S. labor market recovery, domestic inflation expectations and gradual economic recovery outside the U.S.
It’s also important to remember that over the long term, higher rates can be beneficial for fixed income investors. As bonds are sold or reach maturity, the proceeds can be reinvested in bonds with a higher coupon, which can help offset the impact of price declines.
The impact on equities is more mixed, with some sectors benefiting as the economy continues to strengthen and others facing a headwind from higher financing costs. Higher interest rates could make the environment challenging for income-oriented stocks. However, even in a rising interest-rate environment, some higher yielding stocks should continue to do well. Some companies, including banks, can benefit from gradually rising rates, as the hikes are likely to be in response to a strengthening economy. Because many of today’s higher dividend-payers are in relatively economically sensitive areas, in-depth research and selectivity is key.
5. Geopolitical events can rock markets. How can I stay on track during volatile times?
Don’t panic over politics. Every era has its troubles. There are hardships, challenges, panics, and crises. This period is no different. From dramatic elections in Europe and the U.S. to concern over oil prices to the strength of the dollar, there always seems to be a “wall of worry” when it comes to the global economy and the world’s markets.
But economies and markets also share a remarkable history of resiliency, an ability to bounce back after being knocked down that can be both surprising and reassuring. Indeed, despite heightened economic and political ambiguity recently, equity volatility has been subdued while U.S. indexes have reached all-time highs.
Investors have been through a period of intense political drama, and given the sustained level of uncertainty, it’s understandable that some might respond by focusing on the short term. Don’t do it. In the long run, investors’ interests are more likely to be served by pushing your time horizon. That’s one way of staying on track despite unforeseen turbulence.
Another is to remember that the age-old logic of diversification is still valid — be thoughtful and careful, but also stick to a diversified asset allocation. Today’s environment requires a global perspective. Investors should consider having exposure to stocks and bonds from around the world. Ideally, the resulting portfolio will have the potential to benefit from the extraordinary changes in the world’s capital markets that present long-term investment opportunities.
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.