May 20, 2015, 16 months ago, the S&P500 hit an all time closing high of 2126. Yesterday, September 15, 2016, the index closed at 2147. The S&P500 has risen a mere 1% over the last 18 months. Bond markets have not fared much better. Bond yields remain extremely low, at levels not seen since the 1940s. The 10 year treasury sports a 1.70% yield today. Markets remain concerned about rising interest rates, high equity valuations, the election outcome, and slow economic growth throughout all economies globally.
As a result, our strategy over the near term is to continue focusing on income producing strategies. Income strategies include dividend paying stocks, short-term, high yield bonds, and preferred stocks for conservative portfolios. Aggressive and moderate portfolios will follow this strategy, while also investing in select growth stocks.
Over the next 4 to 6 months we expect the Federal Reserve to raise interest rates again. Why? The US economy is at full employment, and although inflation remains low today, the Fed is concerned it will rise. Last fall, the Fed guided the markets to expect a 3% increase in short term interest rates over the next 3 years. We are 9 months into 2016, and the Fed has raised rates a mere 0.25%. We believe the Fed will indeed raise short term interest rates, but over a much longer period of time. Rising interest rates pose material risk to long term bond investors, while short-term bonds do not generate enough income to satisfy our client’s income needs. In this environment, our strategy will continue to be income based, with higher allocations to short-term high yield bonds, dividend paying stocks, and preferred stocks.
Equity markets continue to hit a wall of resistance, as earnings estimates fall and valuations remain full. The only times equity markets were more overvalued than today was during the Great Depression of 1929, the 1991 recession, the dotcom bubble in 2000, and the Great Recession of 2008. When markets have been as overvalued as today, history demonstrates that equity returns over the next 10 years averaged 4.4% annually. For these reasons, we continue to watch for a potential short term correction in equity markets. In the event of a correction, Haven will act to preserve capital by increasing cash positions. We have already placed stop losses (i.e. a strategy to minimize losses) on all stock positions and reallocated portfolios from stocks to short-term high yield bonds and preferred stocks, both of which generate income.
Haven Wealth Group weathered the storm of 2011 when equity indices declined 22% to 33%. Including this period of decline, our inception-to-date (12/31/08 through 8/31/16) average annual portfolio return was 9.7%, with equity returns averaging 14%, net of fees. Please remember historical performance is no guarantee of future returns.
HWG will continue to monitor market conditions and realign portfolios as market conditions dictate. Please call if you would like more details.
Richea, Charlie, and the Haven Wealth Group Team
 Source: Ned Davis Research