Over the past few months, I have had a strong conviction that bond yields in the U.S. were going to rise due to both fundamental and technical factors. Rates have risen even faster than I would have expected given the market reaction to the U.S. Presidential election. The increase in yields has wiped out more than $1 trillion from the value of bonds globally since this summer.
Stocks, in the meantime, have been grinding higher and made new all-time highs last week in the Dow Jones Industrial Average, S&P 500 Index, and NASDAQ. I am torn on the future prospect for stocks from these levels over the next year because of conflicting factors that could impact valuations.
On the positive side for stock valuations, price-to-earnings ratios look reasonable given the current level of interest rates. Additionally, if U.S. growth prospects continue to improve, the potential for topside revenue and earnings growth exists. Reduced regulation should also allow for more investment and less costs to investors.
On the concerning side for stock prices are the issues surrounding rising interest rates and increasing wage inflation on profits. Many of the financial engineering techniques used to increase earnings over the past few years have played out or will be less impactful going forward. Additionally, the potential for protectionist trade policies is a negative for equities across the globe and the strengthening dollar also pressures multinational corporate earnings.
I see the risks and opportunities for stock price appreciation over the next year as roughly equally weighted. As a result, I am cautious on stocks at these levels but will be a buyer of dips. My overall expectation is for a 5% return for equities next year.
On Friday, the November employment report will be released. This is the last piece of key economic data prior to the Federal Reserve’s December meeting. I expect the report to show continued improvement in U.S. employment conditions. However, if the report surprises to the negative and bonds rally, I would use this as a selling opportunity for Treasury bonds.
This blog post is for informational use only. The views expressed are those of the author(s), and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client. Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.