An Alternative To Money Market Funds
June is behind us and what a month it was! US investors are shaking off the effects of the United Kingdom’s stunning decision to leave the European Union on June 23. Markets around the world plunged on the news with the Dow Jones Industrial Average shedding over 600 points the next day. The yield on the 10 Year US Treasury plunged to 1.40% on the news as investors around the world sought the safety of investing in the debt of the world’s largest economy.
As the second quarter ended on June 30, the best performing sectors in the S&P 500 turned out to be the Telecoms, Utilities and Energy stocks. Meanwhile, the Financials continued to stumble as the flat yield curve makes it extremely difficult for banks to be profitable. So, it is not a surprise that the Financials were the worst performing sector in the S&P 500 for the first half of 2016.
The US Federal Reserve will next meet July 26-27. Fed Chair Janet Yellen made clear last month that a UK vote to leave the EU would limit any rise in interest rates in the near term by the Fed. A rate increase would likely lead to a strengthened US dollar, thus reducing the competitiveness of many US multinationals. So, it appears that the Fed will stand pat when it meets July 26-27.
During 2016, firms such as Caterpillar, IBM and American Express cited the strong dollar as a reason for disappointing results when these companies reported earlier this year. Ralph Lauren, the high end retailer, also cited the strong dollar as a reason for its weak outlook while announcing significant job cuts and store closures in early June.
Another sign of weakness in the US economy emerged last month when several of the large investment banks announced staff layoffs including Credit Suisse, Barclays, Deutsche Bank and Goldman Sachs. What is troubling is that the low interest rate environment over the past few years has not generated the economic growth that many of these same firms had forecast. The consumer is not spending the savings that lower interest rates have provided so it is hard to see where job growth will come from in the near term.
Throughout 2016 our guidance has been to focus on defensive type stocks such as the best performing sectors in the S&P 500: Telecoms, Utilities and Energy. We continue to recommend these sectors. Many of the stocks here have a history of raising their dividends annually, provide yields well above the yield on the 10 Year US Treasury, as well as potential capital appreciation. The soft economy will likely continue into 2017 so being defensive remains the prudent choice in our view.
My weekly radio show on WWPR 1490 AM is on vacation. We will return on Friday, September 11. My newspaper column will continue to run on the first Monday of each month in this paper and on the following Friday in the Business Observer.
If you are unhappy with the returns now offered by money market funds feel free to contact us.