Dec 15, 2015 10:29 AM
The long awaited increase in interest rates may arrive soon. It has been 9 years since the Fed last increased rates.
The global economy has been slowing, especially China and other Asian countries. Europe has limped along flirting with recession and low growth rates. Oil prices and especially industrial commodities have sold off because of slower Asian demand. There is excess capacity in manufacturing and employment offshore, adding to low inflation and slow growth worldwide. Most world currencies are lower than a year ago. The one exception has been U.S. dollar. The dollar is higher with increased interest rates in the outlook. Low oil and other commodities have added to better consumer spending, low mortgage rates and high corporate profit margins. The unemployment rate is nearing 5%, a number the Fed feels is full employment and a number which inspires inflation. Since oil prices and other commodities along with interest rates may not go a lot lower from here, profit margins may not increase. If the U.S. economy can continue forward there may be a surprisingly quick up-turn in inflation and a reflection in interest rates.
U.S. stocks as a whole are valued higher than European and Asian companies. Asian markets have sold off on the heels of the China slowdown.
China announced their new 5 year plan to grow their economy 6.5% at a minimum. That is a big number compared to the rest of the world, but much slower than their last 5 years. They are also going to redirect their economic focus from a low cost manufacturing nation to a balanced economy that is consumer driven.
European shares are a good value as to their prices but offer very slow growth. The ECB and its Chairman Dragi, intend to continue a policy of Quantitative Easing, which will provide a lot of liquidity. Liquidity in the system, especially banking, allows borrowers time to make adjustments to negative changes in their industries. When liquidity dries up sellers are forced to sell to fewer buyers and prices can decline dramatically.
The increase by the Fed to normalize interest rates along with increasing wages and eventually higher commodity prices, will increase the headwinds for American companies' growth in profits.
We think it is wise to diversify, slightly, into some less expensive European and Asian blue-chip companies with a part of the equity portion of the portfolios.