In early October, I commented about new market realities to embrace now. Since quantitative easing is officially over, I'm looking at portfolio changes that advisors are making in this new environment. This is the last in a series of blogs for advisors on three trades for the end of QE. Part one examined the eventuality of higher rates, while part two considered the implications of a stronger dollar.
We're no doubt living in interesting times for the markets. As our trading partners around the world continue to experience below-par growth, the U.S. has emerged as the world's economic juggernaut. That leads to a number of implications about where to invest client assets.
First off, energy prices are heading lower—far lower than experts are predicting. Oil was at $20 per barrel in the early 1990s, and the reason it headed higher was the increased demand from rapidly growing emerging markets. With demand heading in the other direction, and U.S. production at record levels, there has to be a market adjustment.
Lower energy prices are a boon to consumers and corporations alike. I expect a sizable bump in retail sales from the recent 30% pullback in crude, and it should more than make up for the negative effect the stronger dollar will have on corporate profits.
It should also make higher interest rates more palatable, although large company stocks should benefit more than small caps over the long haul. Mega-cap stocks may be an even better play.
Second, a lack of global growth should take pressure off short-term rates. Since the Fed isn't interested in a runaway bull run on the dollar, interest rates differentials between countries need to be kept at manageable levels.
