We retrieved Steve Blumenthal‘s notes from Inside ETFs this week and share three top takeaways from the conference.
Rob Arnott’s presentation:
10-year forward expected annualized return for 60/40 is 4%
- For equities: Beginning dividend yield of 1.80%+ real long-term EPS Growth of 1.3% + implied inflation of 2% = 5.1% expected return for equities
- For bonds: 2.3% (10-year Treasury at the beginning of 2015)
- 60% of expected equity plus 40% of expected bonds EQUALS just 4% expected for the traditional 60/40 allocation mix
- The 40 year average for 60/40 is 7.1%
Rob added, “I think we should tell our clients this arithmetic”
Jeff Gundlach’s presentation:
- Japan – very little success with QE
- U.S. – very little success with QE
- EU – likely they will have very little success with QE
- Yields are down everywhere. The yield curve is flattened across the globe in 2014.
- The Treasury bond not only fell in yield but it did it in an almost steady decline. 2014 was the fourth best year for Treasury bonds. The best year was in 2008.
- Noting something I’ve been talking about, he said that he believes the Fed will make an attempt to raise the Fed Funds rate feeling they have to do something to move in that direction but such move will be short-lived. Raising short-term rates will further push the dollar higher and cause the U.S. to further import deflation.
- The down trend line in the dollar (since 1981) has been powerfully broken. The dollar rallied against almost every global currency in 2014 and it is going to continue noting that currency secular cycles last a very long time.
- The decline in oil prices is flat out positive for economic growth
- Remains bullish on S&P stating the U.S. is clearly the place to be. The strong dollar should continue to help that view. He favors cyclicals.
- Several negatives:
- The S&P has never been up seven consecutive years in a row – data going back to 1904
- Margin debt is a worry. When it peaks and rolls lower, it is usually bad news for the equity markets. It appears to be rolling over.
- On inflation: CPI level is lower that it was seven to eight months ago. The story is one of deflation. Deflation is already being imported to the U.S.
- The junk bond market is a wonderful forward-leading indicator and today looks “flat out ugly”. (I’ve noted over many years that it leads the economy and the stock market – see Watch Junk Bonds For Early Signs Of New Financial Crisis)
- The good news short term is that they are no longer richly priced saying, “They are now just a little cheap on their way to really cheap” and added, “the good news is that most of the debt is not set to mature/roll over until 2017-2018.
Joe Davis‘ presentation:
He posed that the number one question not being asked enough is, “Why are we living in a low growth world?” He sees two schools of thought:
- Secular stagnation – not only will growth be low but lower for longer (permanently weak demand, insufficient policy and deflation)
- Structural deceleration – the economy moves forward but at a lower speed limit (a world of gradual monetary tightening and inflation stability)
- He believes Japan and Europe are in #1 above and the U.S. and China are in #2 above
- In secular stagnation, the bond market is best and in structural deceleration, the stock market is best
- Can the U.S. remain resilient in a world that’s in a #1 category? Can the U.S. grow at 3%? Joe answers that maybe we can this year
- He said that “the Fed Funds rate may not get to 2½% over the next number of years. We are maybe in a period like 1997 when the Fed raised rates just 50 bps”. Then the strength of the dollar actually pushed down overall inflation.
- All of this is challenging for the investor:
- Ultra low rates
- Low spreads
- High valuations
- He concluding that Vanguard has the most guarded market outlook since 2006
- And noted: U.S. 60/40 has averaged 9.8% over the last 30 years, 8.7% since 1926 and 7.3% in 2014
- Next five years’ expectation: 3.6%
- Stating, “What’s an investor to do?”
- Adopt a more global allocation view
- Focus on value, not growth
- Focus on total return and not yield
Steve Blumenthal is CEO and CIO of CMG Capital Management Group. The objective behind all of Mr. Blumenthal’s work is to help advisors build better portfolios by allocating with a long term game plan that is risk sensitive and properly diversified. Mr. Blumenthal is a self-proclaimed “quant geek” with an analytical mind for the markets that helps him connect with everyday investors and industry experts alike.