Wealth Management Blog | WrapManager

Are Stocks Attractively Valued?

Posted by Doug Hutchinson | CFA®, Director of Research and Trading

May 22, 2018

Over the past couple of years, the S&P 500 Forward P/E ratio has been above its 25-year average. This has led some market commentators to warn that equities aren’t attractively valued.

A Price to Earnings (P/E) ratio is a valuation measure that shows how much investors are willing to pay for a dollar of a company’s earnings. For example, a company that has a stock price of $30 and earnings per share of $2 would have a P/E ratio of 15 ($30/$2 = 15). A reading above the long-term average is typically interpreted to mean that stocks are expensive relative to the historical average. Similarly, a reading below the long-term average is typically interpreted to mean that stocks are cheap relative to the historical average.

The recent pullback in equities to start the year coupled with continued strong earnings growth has left the S&P 500 Forward P/E ratio at 16.1x at the end of April 2018. The 25-year average S&P 500 Forward P/E ratio is exactly 16.1x. This marks the first time in over 2 years that this reading has not been above the 25-year average.

Should You Still Own REITs in a Rising Interest Rate Environment?

May 8, 2018

When interest rates spiked in early 2018, income related investments such as Real Estate Investment Trusts (REITs) experienced a sell off. The FTSE NAREIT Equity REIT Index returned a negative 8.2% in the first quarter of 2018.¹ Income producing investments will frequently experience a sell-off in the face of a sudden spike in interest rates. Does this mean that you should not own REITS when interest rates increase? [+] Read More

Should You Be Concerned About Rising Interest Rates?

April 3, 2018

With interest rates spiking unexpectedly in early 2018 and the Fed poised to continue raising interest rates throughout 2018, some bond investors have become very concerned about experiencing negative returns in their bond holdings. While rising rates will have a negative impact on the price return of a bond investment, this impact can be offset by the positive impact of coupon income. A rising rate environment isn’t necessarily bad for bond investors in the long run because it will lead to higher coupon payments in the future. As interest rates rise, investors will demand higher coupon payments from newly issued bonds. Also, coupon payments from existing bonds can be reinvested in these newer, higher yielding bonds. [+] Read More

Evaluating the Relationship Between Bond Investments and Rising Interest Rates: Doug’s Quiz Corner

February 16, 2018

What Happens to Bond Investments When Interest Rates Go Up? Consider this scenario: Your friend Bob is concerned about what rising interest rates could do to his bond portfolio. He asks for your assistance in evaluating his bond holdings. In his current bond portfolio, he has the following holdings: $10,000 face value AA rated municipal bond that matures in 3 months and is currently trading slightly below par. $15,000 of a mutual fund that holds investment grade, floating rate bonds. $20,000 of a short-term, investment grade corporate bond ETF which tracks a broad index of hundreds of bonds. $3,000 of a high yield bond ETF that tracks a high yield index of hundreds of bonds. Bob has a long investment horizon ahead of him and he won’t need any of the funds invested in his bond portfolio for many years. To top it off, Bob also has another $100,000 of his portfolio invested in various equity market investments. [+] Read More

How Will Rising Interest Rates Affect Your Investment Portfolio?

March 30, 2017

On March 15, the Federal Reserve raised interest rates for the first time in 2017. Federal Reserve Chairman Janet Yellen moved the benchmark interest rate a quarter percentage point higher, to a range of 0.75% to 1%, and the Fed indicated that the market could expect two more rate increases this year.1 So what does this all mean for you? The answer depends on whether you look at it from a standpoint of being a borrower, a saver, or an investor. Later in this post, we’ll take a look at all three scenarios. But first, here’s a bit of background as to what an interest rate increase actually is, and why they occur. [+] Read More

JP Morgan Investment Outlook 2017

December 12, 2016

Economic warming and political warnings... Short-term interest rates remain extremely low given the relative health of both the U.S. and global economies. 2017 should be a year of global economic warming but also one of growing risks. However, with cash paying less than nothing in real terms in most of the world, investors should still be overweight long-term assets, with a tilt toward those that should do best in a world with somewhat stronger growth, higher inflation and higher interest rates. [+] Read More

Did You Know? Interesting Facts about the Federal Reserve

December 1, 2015

For all the media coverage garnered by the Federal Reserve (Fed) and the potential for interest rate hikes, you rarely encounter basic explanations of how the Fed actually functions. Simple questions, like: How and when was the Federal Reserve formed, and for what reason? How are meetings structured/scheduled, and what are the guidelines for making decisions? The Federal Reserve is arguably the most watched financial institution in the world, yet we’d venture to say that even many expert advisors are unaware of some of the basic ins-and-outs of how it works. We’ll cover a few of those here. (In)Frequently Asked Questions about the Federal Reserve How and when was the Federal Reserve formed, and for what reason? [+] Read More

Eagle Asset Management - Interest Rates and Equity Markets

October 27, 2015

Eagle Asset Management's Richard Skeppstrom reviews the Fed's interest rate decision and discusses current equity markets in this month's market perspective. "Interest-rate constipation U.S. economic growth was nearly 4 percent in the second quarter and the U.S. Federal Reserve decided to leave rates at 0. It was rumored to be a close call but labor conditions aren’t perfect: too many aren’t looking for work, international markets are unsettled and infl ation remains just below target. I didn’t believe 0.25 percent made any difference anyway but equities weren’t thrilled. You might think that after watching these things for 20-some years, I’d know if the news were good or bad; however, I’m not even sure what the news was in this case. Some countries aren’t well-run? Some people would rather not work? In any case, the Fed still believes it imprudent to pay interest on savings. Congrats to the borrowers. [+] Read More

How Rising Interest Rates Affect Stocks and Bonds

September 16, 2015

Recent stock market volatility has given way to renewed curiosity over when the Federal Reserve (Fed) will start to raise interest rates in the U.S. A recently released poll by the National Association of Business Economics showed that just 37% of surveyed economists believed the Fed would hike rates in September, meaning that a majority of those surveyed think it will come even later in the year (if not next year).1 The question on many investors minds, however, isn’t so much when the Fed will start to raise interest rates, but how it will affect the economy and the stock market. Theoretically, as the Fed starts to raise interest rates, it becomes incrementally more costly for businesses and individuals to borrow money—meaning that economic activity could feel some headwinds over time. Investors often worry that rising interest rates could thus mean choking off the already fragile economic expansion, and that a slowing economy could mean falling stock prices. [+] Read More

The Impact of Rising Interest Rates on Your Portfolio

June 17, 2015

You’ve probably heard it more than once in the last few months: the Federal Reserve appears likely to commence “lift-off” of interest rates at some point later this year. Some analysts believe the first rate hike could come this June, others point to September. At the end of the day, no one really knows for sure when that first hike will come (even the Fed is reluctant to commit to a defined timeframe). But there does seem to be consensus around one view: it will eventually happen. Source: Federal Reserve, FactSet, J.P. Morgan Asset Management. Market expectations are the federal funds rates priced into the fed futured market as of the date of the March 2015 FOMC meeting. *Forecases of 17 Federal Open Market Committee (FOMC) participants, midpoints of central tendency except for federal funds rate which is a median estimate. Data are as of April 30, 2015 Click to view larger image So what does that mean for investors? Do rising interest rates spell trouble for equities and the fixed income markets? Is now the time to adjust your investment portfolio? Using history and hard data as a guide, we’ll take a closer look. [+] Read More