Bob Miller: Looking ahead at the stock markets

Choose wisely

Looking ahead at
the stock markets

By Bob Miller

Choosing
where you will find investment returns for the upcoming year is fun for readers
and crystal ball-gazers alike. Allow us to
share some thoughts of our own, representing
our conclusions from a conglomeration of
opinions I've collected.

1) U.S. interest rates
have seen their low point and will likely rise a bit over the next one to three
years, according to Putnam ( Nov. 14, 2013). It's already started, with
the 10 year treasury yielding 2.5 percent
versus the 1.6 percent seen in early May of this year.

Rising interest rates may cause
the price of bonds and mutual funds to decline. Bond fund investors may have
experienced a mix of high, declining interest rates with the potential for
above average return in bond funds. Those days may be over and bond investors
may face a head wind instead (low, rising rates). But don't fret. There are
other ways to potentially earn competitive returns in fixed income as well as
unique investment strategies whose returns are not dependent on the bond or
stock markets. Now is the time to learn about them.

2) The positive
returns we have seen in the U.S.
stock market should continue, based on the S&P 500, but in a less dramatic
fashion. Only recently have we started to see a "net inflow" of retail dollars
to U.S.
stock mutual funds after years of net outflows. This indicates that the average
investor continues to do what I call "rear-view investing" – making their
investment decisions on what has happened in the past instead of considering
the future. You wouldn't drive your car that way (we hope!).

The past does not guarantee what will
happen in the future. The good news is that there is a lot of cash sitting on
the sidelines; if it is finding its way into the stock market that helps
support stock prices. According to the Wall Street Journal, corporate America has a
record amount of cash on the balance sheet. According to NBC News Business, they
are starting to use their cash as well. Ways that corporate America can
impact the stock market is through buying back shares, increasing dividends,
and acquiring other companies – all of which are friendly to the stock market
because they can potentially reduce supply and improve shareholder value.

Of course, there will be setbacks. But the
belief is that U.S.
stock market performance will be positive
over the next one to three years, perhaps more. Keep in mind when investing in
stocks and mutual funds; it involves risk including loss of principal.

3) If you have missed
the rise in U.S.
stocks thus far, you may have a second chance by looking into international and
emerging market stocks: International Blue Chips as measured by the EAFE
index is up only half as much as our S&P 500 index over the last two years,
as of third quarter 2013. And the MSCI emerging markets index is about the same
value it was two years ago, despite earnings growth. More positively, their P/E
ratios and other measures of value are trading at discounted levels when
compared to historical levels.

All indices aforementioned are unmanaged
and cannot be invested into directly. They do not reflect the fees, expenses,
or sales charges inherent to investing. Index performance is not based on the
performance of any specific investment. As always, you cannot base future
results on past performance.

4) By investing
globally you have the potential for higher income streams. Not all countries
have low interest rates, providing the potential to increase yield without a
less-than- equal increase in risk. Investing in international and emerging
markets involves special risks such as currency fluctuations and political
instability and may not be suitable for all investors.

Another positive is the diversification of
having bonds in more than one country across the globe. Further diversification
comes in the use of different currencies to own these bonds. Be aware that if
the dollar rises relative to other country currencies this may reduce your
return, so if that is a concern you may want to consider going with a manager
that hedges against U.S. dollar strength. That is also true for international
equity investors. There's no guarantee that diversification will enhance
returns or outperform a non-diversified portfolio and it does not protect against
market risk.

The senior loan market, otherwise known as
the floating-rate market, features a variable interest rate that is tied to a
market reference rate and adjusted periodically. This could be attractive in a
rising rate environment because they minimize exposure to interest rate risk.
Other risks involving senior loan investing include market, below investment
grade securities, default, and credit risk. There is no organized exchange for
trading and reliable market quotations may not be readily available. As with
all asset class choices, it is imperative an investor understands the different
ways to invest within those asset classes, as well as the downside risks. Asset
allocation does not ensure a profit or protect against a loss.

5) I believe the U.S. energy sector will "drive" the U.S. economy
over the next five to 10 years, maybe more. As recently referenced on multiple
news reports including CNBC, the United States
just surpassed Saudi Arabia
and Russia
as the largest producer of oil and natural gas. This is partly because of
fracking technology that allows us to pull oil and natural gas from our vast
shale deposits. According to Clifton,
Larsen, Allen LLP (01-2013) and Bloomberg (09-2013), we are also now the
world's lowest cost producer of oil and natural gas, bringing plants and jobs
back to the states where the savings in energy costs exceed the savings in
labor costs by having plants overseas.

Keep in mind that because
of the narrow focus, sector investing may be more volatile than investing more
broadly across many sectors and companies.

There is much more to discuss about where
we see investment opportunities going forward. We encourage you to have a
thorough financial plan with "take action" steps before committing to any
investment strategy.

The
information provided in this article was gathered from a variety of sources,
including, but not limited to nationally recognized news outlets, internet
based finance data, and product seminars and conference. The options voiced in
this material are for general information only and are not intended to provide
specific advise or recommendations for any individual. To determine which
investments may be appropriate for you, consult with your financial advisor.
The economic forecasts set forth in the article may not develop as predicted
and there can be no guarantee that strategies promoted will be successful.

The
Standard & Poor's 500 Index is a capitalization weighted index of 500
stocks designed to measure performance of the broad domestic economy through
changes in the aggregate market value of 500 stocks representing all major
industries. [insert line space] The MSCI EAFE Index (Europe, Australasia, Far
East) is a free float-adjusted market capitalization index that is designed to
measure the equity market performance of developed markets, excluding the US & Canada. As of May 27, 2010 the MSCI
EAFE Index consisted of the following 22 developed country indices: Australia,
Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel,
Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,
Sweden, Switzerland, and the United Kingdom. [insert line space] The MSCI EM
(Emerging Markets) Europe, Middle East and Africa Index is a free
float-adjusted market capitalization weighted index that is designed to measure
the equity market performance of the emerging market countries of Europe, the
Middle East & Africa. As of May 27, 2010 the MSCI EM EMEA Index consisted
of the following 8 emerging market country indices: Czech
Republic, Hungary,
Poland, Russia, Turkey,
Egypt, Morocco, and South Africa. [insert line space]
P/E Ratio is a valuation ratio of a company's current share price compared to
its per-share earnings.

Robert
Miller is a Registered Principal with LPL Financial and President of
Investment Strategists at Better Banks. The investment products sold through
LPL Financial are not insured Better Banks deposits and are not FDIC insured.
These products are not obligations of Better Banks and are not endorsed, recommended
or guaranteed by Better Banks or any government agency. The value of the
investment may fluctuate, the return on the investment is not guaranteed and
loss of principal is possible.

All
investing including investing in mutual funds involves risk, including possible
loss of principal.

About the Author

Bob is a Peoria native, a graduate of Peoria Richwoods with a BA in Economics from Indiana University in 1987. He became series 7 registered in 1988, then received his Principals registration (series 24) in 1995 with LPL Financial, the nation's largest independent broker dealer*. He remains an LPL Registered Principal and is also president of Investment Strategists at Better Banks. Bob believes in community service, supports qualified charitable causes and is a Paul Harris Fellow Rotarian. His personal mission is "To make a positive impact on every person I come in contact with." *As reported by Financial Planning magazine, June 1996-2013, based on total revenue.