July 23, 2013
The U.S. stock market sold off sharply from its highs late in the second quarter, as investors began to fear a less accommodative monetary policy from the U.S. Federal Reserve. In a recent interview, Brian Rogers, the firm's chairman and chief investment officer and portfolio manager of the Equity Income Fund since its inception in 1985, shares his views on the Fed's moves and strategies that make sense going forward.
Fed Chairman Ben Bernanke announced in the spring that the Fed would likely begin tapering the asset purchase programs it has been using to support the economy later this year. The U.S. market dropped significantly in response, as investors feared a potentially higher interest rate environment. But Rogers isn't sold on the idea that a change in Fed policy is a bad thing and points out that markets often overreact to short-term news.
Logically, he says, the markets should have reacted positively to the news, because it means that the economy is getting better. A series of announcements by several Federal Reserve governors in the days following Bernanke's comments suggested that any policy shifts will be gradual. As for the rise in interest rates, this is likely overdue given the strength of the economy.
According to Rogers, the Fed is doing what it planned all along. During the financial crisis, it flooded the economy with liquidity, as did many other central banks around the world. That was needed to staunch the crisis. Since then, it has been working toward stimulating the economy until it was ready to stand on its own. Now it is planning a moderate, gradual move to more traditional monetary policy, and the market drop was probably just a short-term blip.
Stocks with high dividends offer an appealing risk/reward balance in a volatile market, and they have performed well during the past few years. That may change now that 10-year Treasury yields have risen above the average S&P 500 dividend yield. But Rogers says this market segment can still be a good source of total return—especially since many of the higher-dividend sectors are now reasonably valued.
With the recent spike in volatility, Rogers notes that markets react rapidly to everything. Aside from possibly taking advantage of short-term lows to buy equities at lower prices, he would encourage investors not to focus too much on short-term volatility. Positive forces that have driven equity returns in recent years are still at work. Unemployment is down, housing is up, and investors are more confident.
The U.S. market experienced a lot of variability from sector to sector in the first half. The health care sector was up about 20%, while materials was up less than 3%. According to Rogers, this type of market favors strategies that focus on individual companies rather than sectors. Fundamental research can help separate quality companies from those that have, for example, inflated earnings forecasts.
Rogers also is focused on the influence of non-U.S. economies, notably emerging markets. In China, investors have many concerns about speculative financial and real estate activity, as well as skepticism regarding a centrally controlled economy. Rogers is less concerned about China's market in the long term but is aware of how much influence China's actions can have over other major emerging markets and the global economy as a whole. Another influential market is Japan. Investors have reacted favorably to Japan's aggressive efforts to rev up the Japanese economy, as the two-decade downturn in Japan has created a fair amount of pent-up investor demand.
Occasionally, we experience strong rebounds after severe bear markets, including the last one more than four years ago. Since then, U.S. stocks have rallied strongly. Now, valuations are higher, so Rogers thinks it unlikely that we will replicate that type of performance. Returns could be less robust in the coming months.
Rogers points out that there is no such thing as a risk-free time to invest, so investors need to focus on fundamentals and valuations of individual companies. As long as investors properly diversify and don't overpay for growth, their portfolios should stand up to interim volatility.
The views are as of July 2, 2013 and may have changed since that time. This information is provided for informational purposes only and is not intended to reflect a current or past recommendation, or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Stocks and sectors may not perform in line with the managers' expectations. All funds are subject to market risk, including possible loss of principal. The value approach carries the risk that the market will not recognize a security's intrinsic value for a long time, or that a stock judged to be undervalued may actually be appropriately priced. Investing overseas involves specific risks, including currency risk, geographic risk, and emerging markets risk. Diversification cannot assure a profit or protect against loss in a declining market.