tag:blogger.com,1999:blog-72743508481821998692024-02-19T06:42:04.825-05:00On the LookoutMFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comBlogger28125tag:blogger.com,1999:blog-7274350848182199869.post-41353829764244336312015-10-26T17:10:00.001-04:002015-10-26T17:10:26.324-04:00US Consumer Riding High<div dir="ltr" style="text-align: left;" trbidi="on">
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Economic slowing may be offset by its secondary effects — lower energy costs and interest rates.</div>
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Facts about consumer behavior could justify optimism about US growth.</div>
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US consumers alone represent the biggest economy in the world.</div>
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While I was traveling in Michigan and Minnesota last week, several things became apparent to me. Concerns about the economic slowdown in China and the rest of the world are real, but I also saw signs that these fears may be overpowered by a true sense of life improving in the United States.</div>
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<span abp="4420" id="therest">Stores were full of shoppers, restaurants were packed with diners and cars were out on the roads (see Exhibit 1).</span><span abp="4420" id="therest"> </span> </div>
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<span abp="4420">Even in stricken Detroit, new buildings are going up, with an abundance of cranes and construction equipment dotting the skyline.</span></div>
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<span abp="4420" id="therest"><b abp="4432">US consumers doing OK</b></span></div>
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<span abp="4420" id="therest">The Midwest, including the industrial heartland, cannot ignore the general angst about the economy that has dominated the markets. Daily news reports harp on about slow growth, anemic wages, weak energy prices and oil field layoffs.</span></div>
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<span abp="4420" id="therest">Yet this region’s enduring optimism still shows through. Why? No one I met there believes the business cycle is over, and everyone seems to understand that the US consumer is actually doing OK. They also recognize that market cycles are a fact of life, not the exception.</span></div>
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<span abp="4420" id="therest">Let’s review some other facts that justify this Midwestern optimism. US wages have been rising, and the number of new claims for unemployment insurance has fallen to a 42-year low as new jobs have been created each month. The oil-related layoffs do hurt, but employment in the energy sector accounts for less than 2% of total US jobs.</span></div>
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<span abp="4420" id="therest">Meanwhile, prices for staples and other necessities — the basics of life for US consumers — have been declining in real terms and as a percentage of total disposable income. Household budgets are not being drained as much by day-to-day expenses like food and clothing. The cost of driving cars and heating homes has fallen dramatically compared with just two or three years ago.</span></div>
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<span abp="4420" id="therest">Here are more facts about US consumers. They are buying cars and trucks again, so the number of vehicles made and sold in the US is nearing an all-time peak. US single-family home construction was up 14% for the year through August, and each new house creates demand for appliances and other big-ticket durable goods. Core retail sales excluding autos and gasoline have wobbled from month to month but are trending at around 4% annually, with quarterly e-commerce sales growth at roughly 14% year over year. Airplane seat occupancy and hotel room occupancy are close to record highs.</span></div>
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<span abp="4420" id="therest">Some say that the US economic expansion, now going on its seventh year, has been marked by disappointing growth. But trouble can also come from taking on debt to live better now — only to have higher interest rates snatch the good times away as the cost of credit rises. That’s what happened in the 1980s and 1990s. This time around, whatever growth consumers experience is coming from wages and job security, not from borrowing. The debt burden of US households is lower than in the previous three cycles. To me, these facts add up to more evidence of the business cycle’s durability and sustainability.</span></div>
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<span abp="4420" id="therest"><b abp="4448">US consumer matters to global growth</b></span></div>
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<span abp="4420" id="therest">Why does the US consumer matter so much? All eyes are on the current slowdown in China and its ripple effects on emerging markets, which had been the red hot engines of world growth. But to put things in perspective, if US consumer spending alone was ranked as an economy, it would be the world’s biggest, at 15% of global GDP (see Exhibit 2).</span></div>
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By comparison, the entire economy of China — the government, consumers, exports and manufacturing all put together — amounts to only 13% of world GDP. Without a doubt, US consumers matter more to global growth than any one national economy. And they are on a firm footing, showing few signs of being slowed down by China, currency wars or other troubles beyond US borders.</div>
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-36623730272634213252015-10-14T09:34:00.002-04:002015-10-14T10:29:26.661-04:00Rocked Up and Down<div dir="ltr" style="text-align: left;" trbidi="on">
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If corporate earnings flatten in the middle of the US expansion, we can chalk that up to global excess capacity and the strong dollar.<span abp="4280" style="font-family: "Calibri","sans-serif"; font-size: 11pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;"><span abp="4281" style="mso-spacerun: yes;"> </span></span> </div>
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Recorded 7 October 2015. For more market commentary from MFS, visit <a abp="4284" href="http://www.youtube.com/user/followMFS"><u abp="4285">our YouTube channel</u></a>. <span abp="4286" style="font-size: x-small;">No forecasts can be guaranteed.</span> <span abp="4287" style="font-size: x-small;"> </span> <span abp="4288" style="font-size: x-small;">The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</span> </div>
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-69427999054640682842015-10-09T10:34:00.000-04:002015-10-21T11:16:05.151-04:00After Waves of Weakness, Is World Recession Next<div dir="ltr" style="text-align: left;" trbidi="on">
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Asian neighbors and commodity exporters were the first to feel the effect of China’s waning economy.</div>
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The stronger US dollar and weaker global growth have had a second-order impact on US manufacturers.</div>
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Lower energy prices may serve to accelerate consumer spending in the third wave after China’s slowdown.</div>
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China’s spectacular pace of economic expansion has ebbed, and the tides of this slowdown have washed over other countries and markets in a series of waves. Let’s consider the impacts for global growth and the US economy in particular.<br />
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<b>First wave</b><br />
In the wake of China’s much lower economic trajectory, prices of commodities from aluminum to zinc have declined. First to feel the impact have been neighboring countries such as Korea, Taiwan and Singapore, which have been infected with slower growth and fears of recession. Countries that export iron, copper and crude oil have also been affected, especially Peru, Russia, Australia, Chile and Brazil.<br />
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Even the United States, the world’s biggest economy, now in its seventh year of expansion, has experienced disruption, primarily in the energy sector. The business models for hydraulic fracturing of shale oil and gas — or fracking — and for other energy producers have been turned on their heads as output prices have tumbled while input costs have remained the same. Spreads on high yield bonds, which are disproportionately issued by energy companies, have widened dramatically.<br />
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<b>Second wave</b><br />
Big multinational energy, materials and capital goods companies based in the US have seen revenues taper off for two reasons. One-third of this multinational slowdown can be attributed to a stronger US dollar, which makes exports more expensive, with the rest due to the widespread waning of growth caused by the slower path of the Chinese economy.<br />
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Along with this slowdown, the US manufacturing sector has also cooled, resulting in excess inventory overhangs. On top of that, more US data releases have fallen short of expectations. For example, in the employment report for September, wages, new jobs and hours worked were all disappointing, suggesting that the US economy is still expanding but at a slower pace. Even measures of the service sector have moderated.<br />
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But is this the stuff of recessions? The National Bureau of Economic Research — the group that officially calls the beginning and end of each business cycle — lists the causes of recessions going back to the 1880s. Reviewing that list, we can see a repeating pattern across 100 years of causal agents, ranging from sudden drops in government spending at the end of wars to commodity supply and price shocks, interest rate jumps, asset bubbles bursting and excess inventory accumulations.<br />
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None of these recession triggers seem acutely present as we enter the fourth quarter of 2015. In fact, US government spending has started to accelerate for the first time after declining for many years. Global commodity prices have been shocked — but pushed downward rather than upward. Central banks around the world show no signs of raising rates. And though there is a mild inventory buildup, the US is no longer the manufacturing economy it was in the 1950s. Today’s service economy is largely unfazed by swings in stocks of manufactured goods.<br />
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<b>Third wave</b><br />
The least visible and direct effects of China and the associated global slowdown are the ones that interest me the most as an investor. These are the third-order influences on the income and spending of the US consumer, the biggest source of final demand in the world economy.<br />
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Historical experience suggests that energy prices affect the behavior of US consumers and thus — with a lag — global growth. Past episodes of energy price declines that were not set in motion by recessions have been followed about one year later by more consumption and faster world growth. We may already be seeing the signs: US miles driven annually are now rising after holding steady for years. And the mix of new vehicle sales is tilting toward more expensive and less fuel-efficient automobiles and trucks.<br />
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In my estimation, we need to see some stabilization internationally before we can feel confident about committing new money to risk assets such as stocks and high yield bonds. But some of the implications of the bad news from China may end up being good news for the rest of us, by accelerating household and company spending and stimulating growth in those economies that use energy as a major input cost. Those economies are the US, Europe, Japan and — interestingly — even China.<br />
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So, while the final chapter of 2015 isn’t over, this expansion’s ruggedness — not its fragility — may be the most important story for investors looking ahead to 2016.<br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.</span></div>
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<span style="font-size: x-small;"><i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i></span></div>
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-91885244606755365032015-09-17T14:06:00.002-04:002015-10-14T09:33:40.142-04:00Caution is the Byword<div dir="ltr" style="text-align: left;" trbidi="on">
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Now that the Fed has decided to take no action, Jim Swanson considers what this means for the business cycle and the financial markets.
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<a name='more'></a>For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>. <span style="font-size: x-small;">No forecasts can be guaranteed.</span> <span style="font-size: x-small;"> </span> <span style="font-size: x-small;">The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</span> </div>
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-46923316116585597012015-09-15T11:02:00.001-04:002015-09-16T09:38:38.159-04:00Watch the Data Flow Out of China<div dir="ltr" style="text-align: left;" trbidi="on">
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After the recent episode of market turbulence, Chief Investment Strategist James Swanson considers whether China’s slowing growth — but not contraction — could be enough to derail the acceleration we’re seeing in the eurozone and the United States.
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Recorded September 1, 2015. For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>. <br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.</span> <span style="font-size: x-small;"> </span> <span style="font-size: x-small;">The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</span> </div>
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-83440486089523162262015-09-08T12:06:00.000-04:002015-09-15T12:12:30.518-04:00What Really Matters<div dir="ltr" style="text-align: left;" trbidi="on">
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<br />
As long-term investors, we focus on the economic or business cycle. The drivers that determine when the cycle begins and ends matter more to us at MFS than near-term market fluctuations. <br />
<a name='more'></a><br />
Recorded September 1, 2015. For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>. <br />
<br />
<span style="font-size: x-small;">No forecasts can be guaranteed.</span> <span style="font-size: x-small;"> </span> <span style="font-size: x-small;">The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</span> </div>
</div>
MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-63099015654135900762015-08-14T12:56:00.000-04:002015-10-21T11:19:04.212-04:00Thinking Twice About Profits, Currency and Opportunity Risk<div dir="ltr" style="text-align: left;" trbidi="on">
<ul style="text-align: left;">
<li>Markets may be focused on China’s devaluation, but I’m still paying attention to US profits.</li>
<li>A commodity-driven earnings recession has plagued capital-heavy sectors like energy and materials.</li>
<li>I think missing out on a renewed market advance could be the biggest risk for equity investors.</li>
</ul>
<br />
While the markets have been fixated recently on China’s currency moves, I have other things on my mind. I’ve been thinking that it has now been six years since the end of the last recession — making this expansion one year older than the average life span of business cycles after World War II. And for most of these six years, the United States has been on an impressive ride, both for company profits and the equity markets.<br />
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US GDP growth has belied such optimism, however, hovering at a slower annual pace — around 2%, based on the latest revisions — than we experienced in other cycles. Confirming this sluggish growth, the anemic sales reported by companies in the S&P 500 Index over this period have also been below historical norms.</span></div>
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Yet at the same time, corporate profits have been anything but anemic. Gross profits in the S&P 500 remain strong, net profits have been exceptionally robust and the broad measure of overall profits as a percentage of US GDP is at or close to the highest ever witnessed. No wonder the stock market has appeared to move upward with blinders on, ignoring the news reports of substandard economic growth.</span></div>
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<b>Profit expansion</b></span></div>
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Where has this rise in profits come from? I can think of several sources.</span></div>
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<b>Labor costs</b> are typically the most important subtraction from revenues, but during this cycle, annual increases in wages and benefits have been running below the economy’s weak rates of growth. US workers have so far been unable to argue for higher pay and a bigger share of the economy’s expansion — a lingering residual of high unemployment in the 2008–2009 recession.</span></div>
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<b>Labor globalization</b> has also been a factor. Access to cheaper workforces in Asia and South America has helped the production chain achieve huge cost savings, especially for multinational companies.</span></div>
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<b>Technology</b> has been another source of US profit expansion, reflected in asset turnover. Of the world’s major economies, the United States has the highest return on book equity (ROE). Part of the ROE equation is how efficiently companies use — or turn — their assets, which has improved greatly over the past 20 years. The highly profitable technology sector has risen as a percent of the S&P 500’s market weight, and the use of technology has helped other sectors generate rapid growth in earnings and cash flows.</span></div>
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<b>Other advantages</b> for the US include lower energy costs, which have been a tremendous benefit for manufacturing, chemicals and plastics. Low interest rates, modest additions to debt burdens and the shrinking of common share counts through repurchases have also enhanced margin improvements. Add all these factors together, and profits and free cash flows have been the story of this cycle.</span></div>
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<b>Commodity recession</b></span></div>
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Lately the materials sector has been hit by trying to export products while contending with a strong US dollar and slow world growth. The energy sector, which accounts for about 9% of the S&P 500, has been reporting large decreases in sales and profits. These big capital spenders, who had enjoyed sizable sales increases from investments in pipelines and drilling, are now experiencing revenue and profit declines.</span></div>
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I call this period a commodity-driven earnings recession. We have seen three past instances when the prices of oil and other commodities have fallen without a more widespread US recession. Looking back at each case, the bad news in the earnings reports lasted about two quarters, followed by a general pickup in growth. This then led to higher profits — not from margins, but from old-fashioned gains in sales against a base of mostly fixed costs that rose more slowly.</span></div>
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As I see it, we are now at that inflection point. Either global growth picks up soon — getting a push from lower energy input costs and the better buying power granted to US consumers by the rising dollar — or world growth flattens out for other reasons — possibly China — and profits begin to fall.</span></div>
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At an earnings multiple of 18, the market is not priced for such a collapse in profits. Next year, when we look in the rearview mirror, will we see that as a bubble? I don’t think so. I suspect that lower oil, gas, copper and iron prices could spur spending, bringing better growth in profits later this year. The market price today may turn out to be prescient.</span></div>
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</span> </div>
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<b>Currency wars</b></span></div>
<div>
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Just a few days ago, China added currency depreciation to the list of global market concerns. Some have argued that this could be negative, leading to competitive devaluations in other national currencies. </span></div>
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While that may happen, it is important to remember that the renminbi has been appreciating for several years. China’s devaluation was intended to reverse that trend and make its goods more competitive in the global marketplace. That could trigger faster growth in China and the rest of the world, which would be positive — and counter to the fears of China’s economic slowdown that have so roiled the financial markets recently.</span></div>
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</span> </div>
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How far does China want to see its currency fall against other currencies? We don’t know. So there may be more uncertainty in the global outlook after this week. As I see it, however, a weaker renminbi gives US consumers more buying power, helping to stimulate the world’s biggest source of final demand. Admittedly, some US sectors do get hurt by a stronger dollar. Yet with exports accounting for only 13% of the US economy, foreign exchange fluctuations are not likely to derail the current US expansion. Though currency wars can be destructive, they tend to be only temporary skirmishes. Competitive advantages in unit labor and energy costs, as well as technology’s dominant role in the economy, should continue to tilt the playing field toward the US.</span></div>
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</span> </div>
<div>
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<b>Opportunity risk</b></span></div>
<div>
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I see another hazard in the markets that could be called “opportunity risk.” Pessimism is running high, investors are being cautious and mutual fund cash balances have been climbing. But if history is right about earnings recessions caused by weak oil prices, then profits may be poised to rise once more. Corporate efficiency is strong, without much financial leverage. So any topline revenue improvement would go directly to enhance earnings growth.</span></div>
<div>
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</span> </div>
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The continuing story of slow wage growth and subdued inflation has allowed the US Federal Reserve to wait longer to normalize monetary policy — delaying interest rate increases and supporting the margin story that has been in place for this whole cycle.</span></div>
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</span> </div>
<div>
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In addition to these fundamentals, we are in the third year of the US presidential election cycle. Based on historical patterns, the market tends to deliver higher-than-normal returns in that year. For seasonal reasons, the market generally moves up the most in the third or fourth quarter. And when — perhaps later this year — the Fed does begin the hiking cycle, then we can expect the market to make decent gains one year after the first rate increase, if past experience is any guide.</span></div>
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</span> </div>
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So yes, one could argue that it’s important to be cautious and hold on to existing gains. But it’s also possible that the biggest risk may be the opportunity risk of missing out on what could develop as another leg up in one of the most significant, fundamentally based market advances of the past 70 years.</span></div>
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</span> </div>
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<span style="font-size: x-small;">No forecasts can be guaranteed.</span></span></div>
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</span></span> </div>
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i></span></span></div>
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-11586860202390394602015-08-11T09:44:00.005-04:002015-09-15T10:44:38.623-04:00Why Worry About China?<div dir="ltr" style="text-align: left;" trbidi="on">
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--><script type="text/javascript">brightcove.createExperiences();</script><!-- End of Brightcove Player -->Chief Investment Strategist James Swanson outlines his reasons for believing that China’s slowdown is not enough to subtract real economic growth from the rest of the world. Even the dramatic decline in Chinese equities and the potential bursting of the housing bubble may have a limited wealth effect on the population. Admittedly, faltering demand from China has put downward pressure on commodity prices, but this could actually have an upside. <br />
<br />
Recorded August 5, 2015. For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>. <br />
<a name='more'></a><span style="font-size: x-small;">No forecasts can be guaranteed.</span> <span style="font-size: x-small;"> </span> <span style="font-size: x-small;">The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</span> </div>
</div>
MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-30396679060555632472015-07-15T13:08:00.002-04:002015-10-21T11:22:35.996-04:00Our World After Greece<div dir="ltr" style="text-align: left;" trbidi="on">
<div dir="ltr" style="text-align: left;" trbidi="on">
<ul style="text-align: left;">
<li>As Greece moves out of the headlines, what does the rest of the world look like?</li>
<li>Crude oil prices, still well off last year's highs, should be a boon to global growth.</li>
<li>I expect this cycle to progress as revenues and profits at large multinationals gain traction.</li>
</ul>
For months now, the Greek debt repayment saga has been front-page news. At long last, an agreement has been reached between the country and its creditors. Efforts to meet the conditions of this bailout deal will play out over the next few days and weeks, with economic and political consequences in Greece and across Europe.<br />
<br />
If the past is any guide, this issue will probably resurface again, reminding investors everywhere of the long-running battle between creditors and over-indebted governments. But until then, we can get back to the business of understanding the economic cycle.<br />
<a name='more'></a><span id="therest"><br />
<b>Back to the basics</b><br />
While investors were distracted with Greece’s troubles, the global economy has been moving forward. Here is a brief refresher on the basics — my top ten list of positive signs for the US economy:<br />
</span><br />
<ol>
<li><span id="therest">Interest rates around the world remain at historical lows.</span></li>
<span id="therest">
<li>Industrial production in the United States has picked up.</li>
<li>Better employment numbers are evident across the US in almost all job categories.</li>
<li>Consumer confidence has risen, though US retail sales have continued to disappoint as households have yet to spend the gasoline dividend arising from lower oil prices.</li>
<li>US auto sales have accelerated and may soon return to annual volumes not seen since 2007.</li>
<li>Spurred by low inventories of existing homes, the building of new houses in the US has gained momentum — allowing the labor-intensive construction sector to recover the jobs lost in the last recession.</li>
<li>Bank lending to commercial enterprises, usually a leading indicator of more growth, has been rising.</li>
<li>The US dollar has stopped rising, and many exporting companies have started to reclaim sales growth from non-US firms.</li>
<li>Nonresidential business spending is no longer stalled.</li>
<li>Inflation has remained lower than expectations, helping the US Federal Reserve to delay the beginning of the rate-tightening cycle.</li>
</span></ol>
<br /></div>
<span id="therest">Since the drawn-out negotiations over Greece dominated the headlines, the following trends have been clear outside the US:<br />
</span><br />
<ul>
<li><span id="therest"> Japan’s manufacturing economy has improved and labor force participation has been rising — both good signs for US-based multinational corporations that sell products in Japan.</span></li>
<span id="therest">
<li>We have seen further evidence that Europe is recovering from its economic slowdown: German consumers have been spending, exports have risen and the peripheral countries have shown some progress.</li>
<li>The news from the emerging markets has been mixed, with China’s economy weakening but other parts of Asia faring better and with stronger signals coming out of Mexico and Eastern Europe.</li>
</span></ul>
<span id="therest">I conclude that the Greek debt crisis has been an opportunity to add to risk assets. The fall in crude oil from highs near $100 per barrel a year ago should be a boon to global GDP growth — and I think that is exactly what we are likely to see.<br />
<br />
<b>US equities still supported by fundamentals</b><br />
Now six years old, the US business cycle has shown no signs of flagging or falling into recession. The US consumer leads the economy, driven by increasing employment opportunities and longer hours worked — now as high as in the previous cycle — along with better wages and a stronger sense of job security. All these factors appear to be falling into place, pushing the economy forward.<br />
<br />
The US equity market is widely discussed as being a bubble or at a peak. While the debate on the valuation of US stocks rages on, it is interesting to note that rolling 10-year returns on US stocks have been driven first by earnings and next by dividends, with almost no contribution from price-to-earnings ratios rising — which we call multiple expansion. <br />
<br />
The past 10 years have been a story of two full cycles of business activity and a market that has been rising in tandem with earnings — but not wildly ahead of earnings, as the bubble talk would suggest.<br />
<br />
Depending on the path of profits over the next two quarters, we shall see whether the claim that stocks have peaked turns out to be true. Meanwhile, margins of companies in the S&P 500 Index have been quite resilient, and profits as a share of GDP are at 50-year highs.<br />
<br />
Smaller and mid-sized companies have posted decent profit and revenue growth during this cycle, in contrast with the bigger multinational corporations that have exhibited margin strength despite weakness in revenue reports. Yet this divergence may be about to change. An acceleration in world economic activity now seems to be underway, which ought to push up sales at those large companies while their costs remain contained. This could be a recipe for stronger US profit growth in the second half of 2015.<br />
<br />
What can we expect to see next? In my view, the cycle should continue to move ahead. Growth will probably rise, and thus profits should also do well. In 2016 and 2017, however, this slow but steady business cycle may begin to show signs of aging. We may finally see exuberance and excesses emerge — that always seems to happen eventually. In particular, we are monitoring merger and acquisition activity. But for now, none of the indicators we watch are flashing red.<br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.<br />
<br />
<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i><br />
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-12448051987314595672015-06-17T09:36:00.006-04:002015-08-12T11:03:13.110-04:00Still in Midcycle at Midyear<div dir="ltr" style="text-align: left;" trbidi="on">
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<br />
With steady growth in US jobs — and now wages — boosting consumer confidence and pushing the business cycle forward, there’s more talk of the US Federal Reserve raising rates. Chief Investment Strategist James Swanson explains why starting to tighten gradually — say, 25 basis points in September — might not be so bad for the US economy or investors. Recorded June 2015. <br />
<br />
For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>.
<br />
<a name='more'></a><span style="font-size: x-small;">No forecasts can be guaranteed.</span> <span style="font-size: x-small;"> </span> <span style="font-size: x-small;">The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</span> </div>
</div>
MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-58028057330229815232015-05-20T15:52:00.001-04:002015-09-09T12:09:14.566-04:00Let's Hear It for Mediocrity!<div dir="ltr" style="text-align: left;" trbidi="on">
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<br />
While Chief Investment Strategist James Swanson is no proponent of mediocrity, he does think a slower pace of economic growth could help prolong the US business cycle, and that would be good news for company profits and equity markets. Recorded May 2015.
<br />
<br />
For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>.
<br />
<a name='more'></a><span style="font-size: x-small;">No forecasts can be guaranteed.</span> <span style="font-size: x-small;"> </span> <span style="font-size: x-small;">The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</span> </div>
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-19109343784594533922015-04-21T17:00:00.000-04:002015-08-12T11:03:53.456-04:00Earnings Season's Greetings<div dir="ltr" style="text-align: left;" trbidi="on">
<i>Earnings have taken a hit from a combination of lower oil prices and a higher US dollar.<br />
But similar episodes in history suggest that we may still have some clear sailing ahead.<br />
Economic activity and equity valuations tend to pick up in the first phases of Fed rate cycles.</i><br />
<br />
As earnings season commences for the first quarter, we’ve been thinking about the current slowdown and the interest rate trajectory — with the US Federal Reserve’s first hike still likely to occur later in 2015. What does this backdrop mean for equity valuations and earnings?<br />
<a name='more'></a><span id="therest"><br />
<b>Economic data retrench</b><br />
Measures of the US economy’s health have been decelerating, including a disappointing nonfarm payroll report for March. We suspect this slowdown is real — not just a function of the bad winter weather, but the confluence of a consumer spending minicycle, a drop in capital goods investment and a weaker energy sector because of depressed oil prices.<br />
<br />
We have seen episodes like this before, when lower oil prices and a higher dollar have combined outside of a recession. Earnings take a hit for a couple of quarters — especially in the materials, industrials and energy sectors. Remember that energy is considered elastic, which means that it tends to invoke a demand and a supply response.<br />
<br />
Typically about 12 months after such slowdowns, lower oil prices and the stronger dollar boost US consumer spending, and the rise in final demand pulls more economic activity through the system. S&P 500 revenues then rise, and the equity market follows suit. That’s one reason why we think the hit to earnings may be temporary this time too.<br />
<br />
<b>Equity analysts react</b><br />
Furthermore, labor expense as a percent of S&P 500 sales has continued to fall, telling me that fundamental reasons — not financial engineering — are still supporting profit margins. Even though 2015 may turn out to be the weakest year for earnings so far in this business cycle, the situation could turn around again as long as unit labor costs remain relatively low in the United States.<br />
<br />
Admittedly, the forward price-to-earnings ratio of the S&P 500 is a little bit elevated compared to historical levels, and Wall Street analysts are taking down their earnings expectations. But I think these revisions may be too radical. If we look at consumer discretionary, utilities and technology — the sectors that tend to do better 10–12 months after the price of oil falls — then we could see a pickup in earnings and economic activity later in 2015.<br />
<br />
<b>Fed policy calculus</b><br />
The first-quarter slowdown has also been watched by Fed policymakers, who may be more willing to wait beyond June until September, or even later, to see better signs before the first rate hike of this cycle. Whatever the timing, we don’t expect a 25-basis-point increase in the target federal funds rate to hurt that many bond portfolios or, for that matter, have much effect on the real economy.<br />
<br />
Most debt of companies in the S&P 500 Index is now fixed in the bond market, not in variable-rate debt with the banks. And US consumers have not been tapping their credit cards and taking out auto loans as much as they did in the three previous cycles. As a result, the Fed’s initial rate increases are unlikely to stem or curtail economic activity.<br />
<br />
Wages are another thing to watch, and we believe that wages will begin to rise, which would spur rates on the long end of the yield curve to move up slowly. Even with “lower for longer,” interest rates do have to increase if wages are increasing, and that would push up inflation rates. In fact, the pricing of the S&P 500 energy sector — now at very high multiples — suggests that the market believes that oil prices will move higher later this year.<br />
<br />
<b>What to expect when the Fed starts to raise rates</b><br />
Put together the stimulative effects of cheaper oil, the boost to US consumers from a higher dollar and lower-for-longer rates, and history tells us that economic activity and P/E multiples tend to expand in the initial phases of Fed rate cycles. The equity market also tends to do better in the first 12– 18 months of increases in wages and interest rates.<br />
<br />
Historically, that situation has not lasted forever, of course, so we will be on the lookout for a turning point this time. But I think we still have some clear sailing ahead after we get through the rough patch we saw in the first quarter of 2015.<br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i><br />
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32235.7</span></span></div>
MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-72145083333980700092015-04-15T16:39:00.002-04:002015-08-12T11:04:05.636-04:00Profits Recession<div dir="ltr" style="text-align: left;" trbidi="on">
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Jim Swanson considers similar historical episodes with lower energy prices and a strong US dollar, which hampered earnings in the near term but boosted growth in the longer term. Recorded April 2015. <br />
<br />
For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>. <br />
<a name='more'></a><span style="font-size: x-small;">No forecasts can be guaranteed.</span> <span style="font-size: x-small;"> </span> <span style="font-size: x-small;">The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</span> </div>
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-16458488175841580982015-03-13T15:04:00.000-04:002015-08-12T11:05:20.952-04:00Rising Fortunes of US Consumers<div dir="ltr" style="text-align: left;" trbidi="on">
<i>The latest reports on retail sales have been disappointing.<br />
But I’m still optimistic about the health of US consumers.<br />
I expect consumer spending to sustain this business cycle.</i><br />
<br />
During the first quarter of 2015, the list of economic worries has been long — slow business investment, subpar production growth in many sectors, weaker trade and central bank–driven currency dislocations, just to name a few. On top of that, financial pundits have been writing off US consumers, repeatedly describing them as overstretched, hobbled by low wages and too much debt, and discouraged about job prospects.<br />
<a name='more'></a><span id="therest"><br />
I’m not as worried as everyone else, however. As I’ve said before, one of the worst bets an investor can make is to “go short” the US consumer. After all, 70% of the US economy is driven by domestic consumption spending, a much greater share than in many other economies. And amid all the gloom, some shining statistics stand out.<br />
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<b>Consumption matters</b><br />
In the fourth quarter of 2014, US GDP grew at a real rate of 2.2% — less than half the third quarter’s pace and quite a bit below what many economists had predicted. But US consumers increased their spending dramatically that quarter, with personal consumption rising at 4.2% — the most rapid pace since the first quarter of 2006.<br />
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So far in 2015, we’ve been dealing with severe winter weather — especially here in Boston — that has been reflected in disappointing drops in retail sales as consumers have been trapped at home. But now we’re finally beginning to see the piles of snow melt away, and I suspect there will be pent-up demand to dine out and shop for new cars.<br />
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<b>Consumer health checklist</b><br />
Here are some reasons why I think the US consumer is in good shape:<br />
</span><br />
<ul>
<li><span id="therest">Employment prospects have been improving, with job openings rising and layoffs falling, particularly for workers in the private sector.</span></li>
<span id="therest">
<li>Thanks to a better labor market, US consumers are now more confident about the future than at nearly any other time on record.</li>
<li>The assets owned by US households have been increasing in value, including stocks, bonds and, most importantly, their homes — the biggest asset of all. <br />
US collective net worth is now the highest ever.</li>
<li>Houses and cars — the two big-ticket items for US consumers — are more affordable than in other cycles because the interest rates for financing these major purchases are lower.</li>
<li>Households may be starting to borrow again, but this borrowing is not rising as fast as their assets or disposable incomes, so consumer creditworthiness is not being compromised.</li>
<li>The inflation rate has been falling steadily, so each month at the grocery store the cost of a basket of common staples has been going down, not up. This big boost to the real buying power of consumers is just the opposite of what we had been seeing for most of the past 40 years.</li>
<li>The drop in energy prices has been a huge help, as paying less at the pump for gasoline leaves more to spend on other goods and services that may be more supportive of US economic growth.</li>
<li>And lastly, the US dollar has been gaining strength against other currencies, benefiting US consumers by lowering the cost of imports.</li>
</span></ul>
<span id="therest">Lower prices for oil products and other imported goods can act like a tax cut, which is especially important for lower-income households with higher marginal propensities to consume — that is, they tend to spend more of every extra dollar — than higher-income households.<br />
<br />
<b>Spring renewal</b><br />
After decades of watching their debt-to-asset ratios rise while inflation eroded the purchasing power of their wages, US consumers have been making up for the time they lost in the last recession by stepping up their spending. Surveys show that consumers are strikingly more confident than the owners and managers of the companies that supply them with the products that were selling so well before this quarter’s worries began.<br />
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In the second quarter, with the coming of warmer weather, I think consumers are likely to get out and spend, both at traditional retailers and online. The more they spend, the further the cycle of growth is pushed forward. And this old business cycle may look new again.<br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i><br />
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32235.6</span></span></div>
MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-4046714608679485612015-03-06T15:05:00.002-05:002015-08-12T11:05:43.416-04:00React to Facts, Not Emotions<div dir="ltr" style="text-align: left;" trbidi="on">
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<iframe allowfullscreen="" frameborder="0" height="360" src="//www.youtube.com/embed/9Y4a_6RBwuo?rel=0&wmode=transparent" width="640"></iframe><br />
<br />
Chief Investment Strategist James Swanson talks about the direction of the economy and the markets, and how investors act in response to news events and commentary.<br />
<br />
For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>.<br />
<br />
If you have trouble viewing this video on YouTube, please <a href="http://bcove.me/ikdvd8fm"><u>click here</u></a>.<br />
<br />
<a name='more'></a><br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.</span><br />
<span style="font-size: x-small;"><br /></span>
<span style="font-size: x-small;">The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</span><br />
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-42544723304387236152015-02-24T15:00:00.000-05:002015-09-09T12:09:44.093-04:00Never Dive for Yield<div dir="ltr" style="text-align: left;" trbidi="on">
<i>In this low-rate environment, everyone is in the hunt for yield.<br />
When looking for yield, take the time to ask the key questions.<br />
It is important to remember that excess yields often have excess risks.</i><br />
<br />
The interest rates we’ve experienced during our lives have declined, and the yield on bank deposits and certificates of deposit has fallen to almost zero. As investment income becomes scarcer, we face the temptation to reach or, more precisely, dive for yield. This is a quest with deep risks.<br />
<a name='more'></a><span id="therest"><br />
<b>Why is yield so scarce?</b><br />
And why is the income on our investments falling? The answers can be found in the combination of ever-lower inflation worldwide — led by oil, but driven by other factors — and the global glut of money also looking for a place to park. The chase for yield includes a lot of savvy competition.<br />
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According to my dictionary, the term <i>yield</i> is derived from the Old English word <i>geldan,</i> meaning “to pay or repay.” The Middle English word <i>yielden</i> took on the sense of “to produce,” as in growing crops or trees.<br />
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But the financial markets in 2015 look at yield and growth as two different concepts. An ideal combination would combine both concepts — a bit of yield, a bit of growth.<br />
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<b>How much yield is good?</b><br />
And how much should investors expect? The answers are not simple, but it matters that investors ask the right questions. One of the biggest mistakes is to confuse yield and distribution. A company can distribute money and within that payment is a return of capital, which is not the same as either yield or growth but is merely a give-back.<br />
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<b>The idea of yield is quite distinct in bonds and stocks.</b><br />
In the world of fixed income, there is <i>current yield</i>, which is merely the current payment stream, with the opportunity for principal growth limited by the price of the bond. This metric is not as precise as <i>yield to maturity</i>, which tells the investor how much to expect the bond to deliver annually until it expires or matures. Even better is <i>yield to call</i>, or the yield the investor could get until the bond gets called away by the issuer. When buying bonds, it pays to ask what kind of yield we are really getting.<br />
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Equities often offer some yield as well as the chance for growth of principal. For stocks the concept of yield is not contractual, as it is for bonds. <i>Dividend yield</i> is not the result of an agreement or a promise, but rather comes from taking a quarterly dividend payment, multiplying it by four and dividing by the current price of the stock. Clearly the dividend payment could go up or down, as could the stock’s price; either would affect the dividend yield.<br />
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<b>Yield rules of thumb</b><br />
With everyone seemingly in the hunt for yield, it is critical to ask the right questions. After all, excess yields often have excess risks. Here is a quick checklist to follow when looking for yield in today’s marketplace:<br />
<br />
<b>Is the yield composed of true earnings, or is it derived from some return of capital?</b> The biggest <i>yield trap</i> is going for yield that comprises not just earnings, but a return of capital.<br />
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<b>What are the chances of missing payments — that is, credit risk — or the risk of principal losses?</b> It’s important to recognize that some of the highest-yielding instruments are delivering high yield for a reason: The investor is faced with too much risk of not getting the original investment back. The risk of default — or the higher chance of principal reductions or missing coupon payments — is driving the higher yield.<br />
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<b>Is the quoted yield dependent on unrealistic assumptions?</b> A high-yielding stock may look attractive, but only because the market has already determined that it is a poor bet and the chances of more bad news are great.<br />
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<b>What is the chance that cash flows will continue to keep the income stream alive and growing?</b> In the case of stocks or stock-like instruments, we look for the solid ability to generate earnings and pay the dividend. Creditworthiness and demonstrable cash flow growth are virtues in the quest for yield.<br />
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It’s worth our while as investors to be on the alert for tricks that might be masking the return of capital — or measures like current yield, which disguises the true yield on a fixed income investment. Be curious and ask questions to make sure we understand where the yield is coming from and that it’s backed by steady cash flows. And always be skeptical of excess yield.<br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i><br />
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32235.4</span></span></div>
MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-67957416382534941732015-02-13T14:05:00.002-05:002015-08-12T11:07:04.284-04:00Should the Markets be Worried?<div dir="ltr" style="text-align: left;" trbidi="on">
<iframe allowfullscreen="" frameborder="0" height="360" src="https://www.youtube.com/embed/-BdiuLBuxpw?rel=0&wmode=transparent" width="640"></iframe><br />
<br />
Put economic progress in Europe together with low interest rates and energy costs, and we have a recipe for a continued world business cycle with some more propulsion than we had a year ago, says Jim Swanson, MFS Chief Investment Strategist. <br />
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For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>.<br />
<br />
If you have trouble viewing this video on YouTube, please <a href="http://bcove.me/r9xsxw2b"><u>click here</u></a>.<br />
<br />
<a name='more'></a><span id="therest"><span style="font-size: x-small;"><br />
No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i></span></span><br />
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-59834006560714164182015-02-06T14:49:00.001-05:002015-08-12T11:07:25.395-04:00Jobs, Jobs, Jobs<div dir="ltr" style="text-align: left;" trbidi="on">
<i>US payrolls have been expanding consistently.<br />
The mix of jobs and wages has been improving.<br />
Even the “worry zones” are seeing employment growth.</i><br />
<br />
Of course investors ought to avoid complacency, but facts — not rumor and speculation — are their best guard against investment mistakes. Despite the worries we see around the world, one of the most critical considerations for investors is the health of the business cycle. And the most important feature of any business cycle is the employment situation.<br />
<a name='more'></a><span id="therest"><br />
As investors, we like to think longer term than traders think. We also try to base our work on the most fundamental, foundational premises — or what academics call <i>first principles</i>. One of these is that the number of people working — and whether that number is going up or down — matters. The number of workers helps shape the growth of an economy by figuring into final demand, which can either buoy or sink company sales and profits. As profits and sales go, so go the markets.<br />
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<b>What have US jobs been doing?</b><br />
In the United States, for the last week of January 2015, the number of people filing insurance claims because they were out of work was 278,000. While that may sound like a lot of workers collecting unemployment benefits when they would rather be working, it is actually the lowest such number in 10 years.<br />
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What I find significant is that this series has been falling so consistently. Let’s trace the number of workers filing initial claims back to the end of the last recession, now nearly six years ago. In July 2009, the number of applicants for unemployment insurance was 554,000 — more than half a million people. In December 2011, that number had fallen to 381,000, and by the fifth anniversary of the recession’s end, initial claims were down to 303,000.<br />
<br />
Other employment-related measures of the health of the US business cycle have also been moving in the right directions. The number of layoffs has been falling, while the number of new job openings has been steadily rising. These numbers also matter to the US Federal Reserve, with new job openings in particular believed to sway interest rate policy.<br />
<br />
Most important of all, the nonfarm payroll report tells a similar story. The number of workers is hitting new highs, and the mix of job types is improving. Just reported for January 2015, the monthly total for new jobs is 257,000 and the unemployment rate stands at 5.7%.<br />
<br />
Added to the outsized gains in December and November, the past three months have seen the fastest US employment growth in 17 years!<br />
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In July 2009, the nonfarm payroll number was −327,000 — a net loss of US jobs — and the unemployment rate was 9.5%. The biggest job losses in 2008 – 2009 were in the construction sector, as the overbuilding in single-family residential housing came to a sudden halt. <br />
<br />
Once the recession was over, the job gains that did occur were mostly in the lower-paid service and food industries. As time went on, manufacturing jobs increased, helped by growth in the US energy sector and better exports from US multinationals. <br />
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Now we are looking at job growth coming from a better and more balanced mix, including jobs in manufacturing, services, government and even — finally! — construction.<br />
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<b>What about jobs outside the US?</b><br />
Though the “worry zones” remain in China, Japan and Europe, we are seeing some job gains in Japan, and the biggest economy in Europe — Germany — is showing improvements in exports and consumer spending. Even three of the more troubled and indebted economies of Europe — Spain, Portugal and Italy — are finally posting better employment and spending numbers. It’s just possible that lower oil prices and borrowing costs are starting to help non-US economies as well.<br />
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The woes of the world and this global business cycle are well documented. One of the debates is that the rise in prosperity is mostly helping the top 10% or even 1% of earners. This may be true, yet it is undeniable that economic growth helps all sectors. Despite the problems, the main mover of future growth is spending power from workers, and worldwide the number of workers is rising.<br />
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What I cannot ignore is that in the United States, this cycle remains very strong, with many characteristics of a longer-than-normal cycle. The relentless rise in the number of people employed is now accompanied by gains in the number of hours worked. The mix of jobs and pay is also increasingly favorable, evidence of better balance in the labor market. All this points to a business cycle that can be summed up in one word — <i>expansion</i>. And expansions help investors.<br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i><br />
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32235.4</span></span></div>
MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-22102224598266824212015-01-30T11:53:00.000-05:002015-08-12T11:07:50.934-04:00Some Gears Slip, Others Align<div dir="ltr" style="text-align: left;" trbidi="on">
<i>Lower oil prices and the stronger US dollar are hurting some companies but helping others.<br />
With correlations across investment options falling, picking the right spots will matter more.<br />
My assessment is that these changes and disruptions could turn out to be a net benefit.</i><br />
<br />
The ramifications of 2014’s dramatic events in the oil and currency markets are spinning different effects around the globe. Let’s examine some of the basic concerns and uncertainties, as well as the opportunities we see for 2015.<br />
<a name='more'></a><span id="therest"><br />
<b>Lower energy prices</b><br />
The drop in oil and gas prices will ripple through the US economy and equity markets differently. The first difference we expect to see in 2015 is that earnings in some sectors of the stock market will slip. After the rather uniform and orderly march upward we’ve been witnessing since the business cycle began in 2009, this divergence is news.<br />
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Now, in early 2015, the fall in oil prices threatens earnings in the energy sector — of course — and among materials exporters and capital goods companies that make big machinery. As revenues fall and the previously exuberant oil and gas industry pulls back from spending on new wells and transportation, these areas of the market are going to suffer earnings hits and disappointments. The effects should be felt during the first six months of 2015.<br />
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<b>Stronger US dollar</b><br />
The second difference we are seeing this year is that big multinational companies have been feeling the negative effects of a higher US dollar. While exports are a relatively small part of the reported size and growth of the US economy, sales of goods and services outside the United States are a very big part of the S&P 500 Index. A stronger US dollar will impede the sales of many large companies.<br />
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What I expect is a trendless market from now until June. The market may be concerned about the uncertainty of non-US growth — especially the implications of the fall in oil — and will need to see some reassurance about the 2015 track of the global economy — in the US and elsewhere.<br />
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During the second half of the year, I anticipate that three signs of better times may become apparent around the world:<br />
</span><br />
<ol>
<li><span id="therest">Germany, Europe's biggest economy and a huge exporter, could benefit as the weak euro lowers the price of its exported goods.</span></li>
<span id="therest">
<li>Japan, which imports nearly 100% of its oil, could experience the benefits of lower energy prices.</li>
<li>China, another big exporter, could see improved growth as the US consumer realizes the strong US dollar’s buying power.</li>
</span></ol>
<span id="therest">In the US, the lagged effects of lower oil prices should show up as a stimulus to spending. Sectors related to the consumer and companies that use energy as a base input will most likely get an earnings boost and a push forward in stock prices. <br />
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We look for the boost in spending to be felt by transportation, consumer discretionary and other areas, while automakers, chemicals and plastics could experience a lift from lower energy costs.<br />
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Among emerging markets, the stronger dollar and lower oil prices could give oil importers like China and some eastern European countries a boost, but oil exporters may continue to suffer. This is likely to remain an area where selectivity is critical, and we’ll keep our eyes open to discern the more attractive investment opportunities.<br />
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<b>Falling correlations</b><br />
So in 2015, the gears may slip in some areas and align for higher growth in others. Falling correlations among stocks, between market sectors and across countries have been the trend for several months. Different rates of growth and contraction mean that putting our investment dollars in the right spots will matter more this year.<br />
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When we look back on the data for 2015, I wouldn’t be surprised to see that more consumers and businesses were helped than hurt by lower oil prices, lower interest rates and currency adjustments. It is my assessment that these changes and disruptions could turn out to be a net benefit, and the current business cycle won’t be broken but will motor on — perhaps on a different path than we may have expected, yet still expanding in the second half of the year.<br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i><br />
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32235.1</span></span></div>
MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-22090062150593699262015-01-14T15:20:00.004-05:002015-08-12T11:08:11.845-04:00Don't Blame the Business Cycle<div dir="ltr" style="text-align: left;" trbidi="on">
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MFS Chief Investment Strategist James Swanson reflects that a higher dollar, lower energy prices, and a lower cost of capital tend to perpetuate business cycles, which may bode well for fundamental long-term investors in 2015.<br />
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For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>.<br />
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If you have trouble viewing this video on YouTube, please <a href="http://bcove.me/vrpnwcj4"><u>click here</u></a>.<br />
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No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i></span></span><br />
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-27029103600639134332015-01-09T15:39:00.000-05:002015-08-12T11:08:34.197-04:00Pulled Apart or Pushed Ahead?<div dir="ltr" style="text-align: left;" trbidi="on">
<i>There may be things to worry about, but there’s also good news.<br />
In my view, the global economy is not being pulled apart in 2015.<br />
Low energy prices, interest rates and inflation could push the world ahead.</i><br />
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At the beginning of 2015, the worry machines of the world are working full time. We hear that China is a bubble, Japan cannot be fixed, Europe is a mess again and the United States is showing signs of slowing.<br />
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There may be some truth in all this, but there are other truths that we should also consider.<br />
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<b>The drop in oil prices is basically good for 70% of the world’s economies.</b><br />
The biggest economic regions, mentioned above, are all net importers of energy, and now that the price of crude oil has been roughly cut in half, their costs of doing business will also fall. Further, a drop in commodity prices tends to spur overall spending. Historically, going back over 50 years, a 20% decline in oil prices has signaled a 0.5% – 1% rise in the rate of real global GDP growth during the subsequent 12 months. The current drop in oil is about twice that.<br />
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<b>The world’s currencies have been going through a dramatic readjustment.</b><br />
Many local-country currencies that were once the darlings of international investors have fallen, while the value of the US dollar has risen. For US consumers, the world’s biggest block of final demand, a stronger US dollar boosts buying power and creates demand for cheaper imported goods, from cars to smartphones. Exporting countries — such as Germany, Japan, China and others in Asia and South America — can sell more manufactured goods in the world market.<br />
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<b>The US expansion has not been purchased at the expense of future growth.</b><br />
Though this business cycle — now in its sixth year — has been characterized by low interest rates, no one is rushing to borrow. During the three previous business cycles, US consumers and businesses took on more debt as the US Federal Reserve lowered rates to kick-start economic activity. This time, however, the increase in US private borrowing has been more than offset by even bigger increases in the value of the underlying assets — as well as gains in the income and cash flows that support the repayment of that debt. In other words, the risk to this cycle of higher rates coming from the Fed or the market is not as dramatic as in previous cycles.<br />
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<b>The theme of the world consumer may be revived.</b><br />
Admittedly, global growth has been sluggish, but the world population has continued to expand. Household formation, along with its related spending, was deferred during the slowdown. I think the demand for goods driven by growing populations — especially in developing countries — is likely to re-emerge. Thanks to currency moves and lower energy prices, many goods are now cheaper, while world wages are generally rising. The emergence of the global consumer, a popular investing theme a few years ago, has been given an added boost.<br />
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On the whole, the mix of data does not suggest any kind of runaway boom in 2015, but at the same time, a global recession seems a long way off. Arguably, the world banking system has been largely repaired since the damage in 2009. For those investors scarred by the drops in global security markets six years ago who have been reluctant to return, it may be worthwhile to reconsider that the realignment of currencies and energy prices could be a long-term positive impulse to world growth.<br />
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So in 2015, let’s be grateful for organic, slow and steady growth, not leveraged boom-like growth. Let’s hear a cheer for lower, not higher, energy prices. And let’s bear in mind that when low interest rates rise someday, it will be a sign that normalcy is coming back, not that disaster is looming.<br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i><br />
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-15080404869820038722014-12-18T12:23:00.004-05:002015-01-16T16:38:08.473-05:00Mixed effects of lower oil<iframe width="640" height="360" src="//www.youtube.com/embed/YX9dFPZHYG4?rel=0&wmode=transparent" frameborder="0" allowfullscreen></iframe><br />
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James Swanson, Chief Investment Strategist, wonders about the sustained impact of the dramatic plunge in oil prices on global financial markets and the business cycle. <br />
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For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>.<br />
<br />
If you have trouble viewing this video on YouTube, please <a href="http://bcove.me/as9qubon"><u>click here</u></a>.<br />
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<a name='more'></a><span id="therest"><span style="font-size: x-small;"><br />
No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i></span></span><br />
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-64986811214030924672014-12-10T14:18:00.003-05:002014-12-11T10:39:09.898-05:00Market Insights 2015Collaboration is part of the culture here at MFS and a key component of what drives our long-term approach to investing. Last week my colleagues Bill Adams and Kevin Beatty joined me to present our Market Insights webcast. At the beginning of 2015, Bill will be taking on the new role of Chief Investment Officer for Global Fixed Income and Kevin will become our first Chief Investment Officer for Global Equities.<br />
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During the webcast, we explored the economic, fixed income and equity trends that we think will drive the markets in the new year. Here are some highlights.<br />
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<b>Economic overview</b><br />
<ul><li>Aside from the United States, which is near cycle highs based on manufacturing purchasing managers’ indices, the major regions of the world are marginally positive or flirting with contraction.</li>
<li>The outlook for US consumers appears to be brightening, especially as falling gasoline prices have put more money into their pockets, while businesses are finally beginning to reinvest after years of underspending on their capital stock.</li>
<li>From the evidence of third-quarter reporting season, we see that companies have continued to do extremely well in terms of earnings growth and net margin expansion.</li>
<li>One risk to our positive outlook is that wage increases could force the US Federal Reserve to tighten more quickly, hampering economic growth and triggering corporate profit margin deterioration.</li>
</ul><br />
<b>Fixed income</b><br />
<ul><li>We think global liquidity from the major central banks will continue to expand and low yields in other developed markets will help to anchor the long end of the US Treasury curve, providing the Fed with a window of opportunity to raise interest rates in 2015.</li>
<li>Falling market-based inflation expectations and global disinflationary forces could keep the Fed from acting sooner, but we caution against putting too much weight on these inherently volatile measures that are closely related to short-term noise in commodity markets.</li>
<li>The anticipation of a Fed hike has tended to induce market volatility, which we believe creates the potential to take advantage of attractive valuations during selloffs— for example, higher-quality high yield and emerging market debt.</li>
</ul><br />
<b>Equity</b><br />
<ul><li>Total returns have been stronger for US stocks than non-US stocks, but the pattern of outperformance across sectors has been similar.</li>
<li>Based on price to next-12-months’ earnings ratios across major regions, valuations generally appear fair in developed markets and cheap in emerging markets, though we caution against using such a broad brush to paint a picture of these markets.</li>
<li>Since mid-2012, both prices and valuations have expanded in the US equity market, while corporate earnings have kept pace with price increases until recently.</li>
<li>Both equity performance and risk can be sourced from a number of factors that vary over time, so as active investors, we try to stay vigilant in our risk management practices.</li>
<li>Recognizing that an exogenous shock from the fixed income market has the potential to derail the equity rally, we have been closely monitoring liquidity, which has deteriorated markedly — particularly among corporate bonds — with the Dodd-Frank regulations introduced after the financial crisis.</li>
</ul><br />
<a href="https://event.on24.com/eventRegistration/EventLobbyServlet?target=lobby20.jsp&eventid=886124&sessionid=1&key=20BAB1554D132FFA244F5FB070D95EC7&eventuserid=109732712"><u>Watch a replay of the full webcast.</u></a><br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i><br />
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29477.26</span></span></span>MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-34431157971292926172014-11-24T16:43:00.001-05:002015-01-16T16:38:18.433-05:00Credit market fundamentals<iframe width="640" height="360" src="//www.youtube.com/embed/1yDfR3He098?rel=0&wmode=transparent" frameborder="0" allowfullscreen></iframe><br />
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Chief Investment Strategist James Swanson says that investing in the high grade and high yield markets requires diligence and vigilance, taking both fundamentals and valuations into account. <br />
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For more market commentary from MFS, visit <a href="http://www.youtube.com/user/followMFS"><u>our YouTube channel</u></a>.<br />
<br />
If you have trouble viewing this video on YouTube, please <a href="http://bcove.me/bs30qtx5"><u>click here</u></a>.<br />
<br />
<a name='more'></a><span id="therest"><span style="font-size: x-small;"><br />
No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i></span></span><br />
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.comtag:blogger.com,1999:blog-7274350848182199869.post-50186086616104457432014-11-18T16:30:00.000-05:002014-11-18T16:30:53.932-05:00Fearing the Fed<i>Now the talk is that by doing less, the Fed could trigger a market collapse.<br />
I suspect there are limits to how high US rates will go when the Fed is on the sidelines.<br />
The US economy’s forward momentum should also continue to support the stock market.</i><br />
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The US central bank, the Federal Reserve, is the subject of criticism, no matter what it does. It has been roundly criticized for making money too easy and creating bubbles everywhere — in short, that its actions aren’t working. If its actions <i>are</i> working, then the talk is that this artificial support will have to be removed, and the Fed will trigger a market collapse by doing less.<br />
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I suspect, however, that the easy money accusation against the Fed — and the implication that stock prices have to fall without its efforts to keep rates low — may be erroneous. Here are my reasons:<br />
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<b>Low rates and signaling</b><br />
Now that its unusual program of bond buying known as quantitative easing has ended, the Fed is hinting that it will set out to slowly raise interest rates in 2015. By any comparison with previous cycles, rates are low and real rates, or stated government bond yields minus inflation, are abnormally low — especially when contrasted with the story of better growth in the US economy.<br />
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The Fed has already signaled its intention to let rates rise, and the equity market has continued to go up. Increases in interest rates, particularly those induced by the Fed, have historically been greeted by a rising, not falling, stock market. Why? Because such actions by the US central bank tend to occur in the face of expanding economic activity and the stock market welcomes sustainable growth. Also, price-to-earnings ratios often rise, not fall, in the face of protracted rate increases.<br />
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<b>Debt and interest expense</b><br />
The net debt held on the balance sheets of companies in the S&P 500 Index is much lower relative to their cash flow than we observed in the past three cyclical peaks. Therefore, a rise in rates won’t have the same negative impact on profits as in previous cycles. And the share of debt whose interest expense has been fixed is now at historical highs: 88% of the net debt of the S&P 500 is fixed with the issuance of public bonds, not at the mercy of flexible-rate bank loans. The high share of fixed-rate debt will also tend to cushion any shocks from rising rates.<br />
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Furthermore, US consumers — who buy most of the consumer goods and services produced by publicly traded companies — have far less debt relative to their disposable income than in other cycles. Thus, they won’t have to pull back spending that much to pay for higher debt service burdens.<br />
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<b>Supply and demand imbalance</b><br />
The world may be awash in government debt of all sorts, but it is also awash in savings and accounts that seek safety. Massive reserves have piled up in emerging markets, exporting countries and pension funds. These huge storehouses of money — accounting for about 28% of global GDP — reside mostly in US dollars and pursue primarily AAA-rated debt to purchase.<br />
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Yet the supply of triple-A debt has been dwindling as more countries receive lower ratings from credit agencies. And the United States, the world’s biggest supplier of new debt, has experienced smaller government deficits and so has less need to borrow. With the supply of good bonds shrinking while the demand for them rises, this imbalance tends to work in favor of higher bond prices and lower yields, which also puts a limit on how high US rates will go when the market, not the central bank, is determining rates.<br />
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<b>Concluding thoughts</b><br />
My first conclusion is that if the equity market was vulnerable to collapse from the Fed’s actions to taper this year and tighten next year, we would already have seen it by now. After all, the markets try to anticipate what is coming next. Fed rate increases should come as no surprise to investors who have known for years that rates haven’t been at the equilibrium levels that the markets would set.<br />
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Second, there is little support for the claim that the stock market is a bubble. Many valuation measures suggest the market is in fair value, not peak price, range. Third, inflation around the world is subdued or falling, further curbing the upward rise of interest rates.<br />
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Finally, the impressive profit performance of S&P 500 companies late in 2014 shows no signs of abating. I believe the evidence is piling up that the forward momentum of the US economy can support higher profits — and higher rates.<br />
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<span style="font-size: x-small;">No forecasts can be guaranteed.<br />
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<i>The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.</i><br />
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MFS Investment Managementhttp://www.blogger.com/profile/14084209804688368522noreply@blogger.com