5 Takeaways From the 2015 Morningstar Investment Conference
Investors should watch the velocity of rate increases, keep Greece in perspective, and mind diversification in a world with very few good values.
Jason Stipp: I'm Jason Stipp for Morningstar and welcome to a special Morningstar Investment Conference edition of the Friday Five. Joining me with five takeaways from the conference so far is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Jason.
Stipp: We've attended lots of the keynotes and sessions so far. You have five key themes across several of the sessions. The first one is rising rates. We know it's going to happen, but that's not the only question that investors should concern themselves with.
Glaser: There is no question among the presenters here at the conference that the Fed is going to raise rates at least once this year. It seems like the consensus is that twice is the most likely outcome.
The dispute, or the question, is how fast are they going to raise rates after that? Are we going to get back to a long-term normal very quickly? Are they going to be forced to raise rates as the economy starts to heat up? Or are they going to keep rates at a low level for a very long time?
Right now the market is implying that it is going to take a little bit longer for the Fed to get back to normal. But several people, including David Kelly from J.P. Morgan Asset Management, think that the Fed is already behind the ball. They are going to have to raise rates pretty quickly because the labor market is tighter than they expect, and a lot of the people on the sidelines are not really in the labor force--they are never going to come back to the labor force. That needs to be accounted for, and rates need to go up.
We heard from some bond managers that there is a lot of complacency about very low rates right now, and that this is a cycle. Rates are going to go up, and people need to be prepared for that.
So, it seems like the real question has shifted from, are they going to raise rates? The answer is yes. The question now is, how fast is it going to go? What does that mean for the rest of the yield curve, and what does that mean for your investments?
Stipp: Another key topic at the conference so far has to do with valuations, not only stock market valuations but also bond market valuations. It doesn't seem like there is a lot of opportunities right now.
Glaser: Valuations have been an important topic for years now. We started after the financial crisis talking about how much value there was, and that has quickly morphed into not being able to find value.
On the equity side, generally speaking, people see stock valuations as full, a little bit stretched, but no one seems to think that it's over the top in terms of where we are. Even Jeremy Grantham thinks that we are still not quite in bubble territory. He think that we are on our way and we're going to get there, but we are not there yet, and there is still some room for this rally to go and there is no impetus for stocks to start to come back in.
Others, again like David Kelly, think that there is some more opportunity out there, particularly when you look at stocks relative to bonds.
There seems to be more consensus that bond valuations are pretty terrible, particularly for things like U.S. Treasury bonds. With interest rates being held down so artificially by the Federal Reserve, Treasuries just don't provide a lot of value. When those rates do start to come up, we could see a chance of some capital losses, and there seems to be a lot of concern about valuations there, and in high yield as well, and elsewhere in the bond market.
Stipp: An interesting point from Jeremy Grantham's keynote had to do with corporations' capital expenditures--or lack thereof. We are seeing a lot of companies have a lot of cash, but they are not necessarily building new plants and making business investments.
Glaser: One of the reasons that Grantham doesn't think this rally has run out of steam yet is that capitalism isn't working as expected right now. You would think that as the economy gets better, you would have this capital expenditure, you would create overcapacity, and that would bring prices down and move the economic cycle forward.
But because the money is just sitting on the balance sheet or it's being spent on share buybacks in order to make stock options more valuable, that really is a very challenging thing for the economy. It keeps us in this suspended state and keeps the market moving up, Grantham thinks, temporarily. He thinks we're going to have to pay that back over time, but it is an interesting way to think about why companies are both sitting on so much cash and why this recovery has been going on for so long, even at a very slow rate.
Stipp: We also know in the background of the Morningstar Investment Conference are continued high-stakes negotiations over Greece. What are experts saying about those particular problems here at the conference?
Glaser: No one seems to be particularly concerned about what's happening in Greece. It's come up at almost every session-- is this something to worry about? And the answer is almost always no.
Elaine Stokes from Loomis, Sayles says she doesn't think it's going to be a major issue, but if it does create some short-term dislocation in the bond markets, perhaps that's a buying opportunity in a place that hasn't had very good valuations.
So, generally speaking, the panelists and all the speakers here don't see Greece as a major catalyst for creating any kind of a worldwide problem. Those linkage mechanisms just aren't there right now. David Kelly described it as, if you have a domino effect, the dominos need to be close enough to actually hit each other, and the fence around Greece is tall enough now that's just not going to happen.
Stipp: We've got rates that are going to rise in the future. We've got valuations that don't look great. We have some issues with corporate America, maybe some large global macroeconomic issues going on. So, what do I do as an investor?
Glaser: That's why people come to the conference, to get the answer to that question. Generally, it's been a pretty boring answer: Diversification continues to work. Instead of trying to time exactly when stock market valuations are going to come back closer to normal, instead of trying to time when rates are going to go up exactly, carrying a broad diversified portfolio is going to be the right call for the long term.
We heard from any number of people that this is really the key to investing success. Not only own U.S. stocks now, but be in Europe, be in emerging markets, even though there are some potential problems, there are also potentially better returns. If you see the dollar start to come in a little bit, that [global diversification] could be helpful there as well.
On the bond side, just owning U.S. Treasuries could be challenging. Maybe having a broader view of what your bond portfolio should do and can do, and maybe moving into some other areas--not recklessly--but think about owning bonds again in Europe and emerging markets and elsewhere in order to diversify that risk away a little bit. And also think about the bonds as a diversifier, not necessarily something that's going to generate a lot of return for you.
So, the advice hasn't been very exciting, but I think it's probably the right call to not get too excited by any of these single things and to really think about that long term.
Stipp: Stick with the basics. Five great insights from an interesting conference so far. Jeremy, thanks for joining me.
Glaser: Thanks, Jason
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.