The U.S. dollar has strongly performed year to date having risen over 10% as of this writing. That has positive and negative impacts on the U.S. and its economy. Former Secretary of State James Baker noted some time ago that the U.S. remains an economic powerhouse, and we think that still holds true today. It was Baker who as then Secretary of the Treasury, led the effort to weaken the dollar in the mid-80s in collaboration with several central banks around the world. If the dollar is too strong, that can hurt U.S. companies as it makes their goods and services more expensive in overseas markets. If the dollar declines that obviously aids international business. Add that as international investments accelerate any positive returns are in part, and perhaps significantly, due to the impact on exchange rates. Many investment houses have for some time suggested investors look into emerging markets funds and we think that a diversified portfolio should include that. We remain cautious however because we feel that any enthusiasm for returns from those markets has a weaker dollar as a key element for those returns. There is no way to be certain as to the direction of the dollar however we would expect the U.S. to work to ease its value soon. This might prove helpful as the economy continues to slow or perhaps if we are in a recession, as we believe we are now.
We see the economy continuing to slow due to quantitative (or monetary) tightening but also, as Fidelity Investments pointed out in their Quarterly Market Review last week, fiscal tightening. The U.S. deficit, as a percent of GDP, has gone down to 4% vs 12% a year ago.
We remain optimistic on muni bonds
As yields have risen so has investor interest in municipal bonds. Munis continue to offer higher long term yields vs U.S. Treasuries which you would typically expect in all bonds. U.S. Treasuries at this point have relatively the same yield over the entire stretch of the yield curve. One interesting development on the muni market is the impact of the American Recovery Act (ARP) signed last year. That 1.9 trillion spending bill sends over $350 billion to states and localities. We also take note that many states are running a surplus and will have this to add to their coffers. This is another reason we see munis growing in attractiveness. Most munis are held by individual investors (vs institutions) but many of those tend to invest in short to intermediate term munis vs longer term. We take note that Lord Abbett (a mutual fund company) has pointed out that longer term munis have outperformed short and intermediate munis over time.
We remain optimistic on the health care, biotech and consumer staples stocks/sectors.
We take note from history that these sectors tended to perform stronger in past downturns or recessions and think investors should give them consideration. Note that biotech would be considered more speculative, so we suggest investors govern their actions accordingly. Major U.S. pharmaceutical companies as well as medical equipment, facilities and health insurance would comprise the health care sector. Consumer staples, from groceries to food staples and household items have also tended to perform strongly in past downturns. We also note that the U.S. banking sector continues to report that it is in strong financial shape at this time and that investors should take that into consideration as well. We do see inflation slowing as key drivers of shelter, transportation and materials have all come down in prices throughout the month of July. We will see by mid-August what the Labor department will report but remain optimistic that inflation will slow.
We are cautious on housing, materials, crypto and world energy markets.
We take note that prices for houses (while pending home sales have continued to drop) have continued to increase. Here is the interesting part of that: The price appreciation and pending sales are mainly for homes above 500k while prices for homes on the lower end of the scale are eroding. We are seeing the same trend by the way on electric vehicles: Demand and prices are higher for more affluent Americans. Major U.S. car makers are in the meantime forging ahead with making medium and lower cost EVs available for mass production and at considerably lower costs than current EV manufacturers. The legacy U.S. automakers might be worth some consideration if investors agree with that.
The world energy picture continues to demonstrate concern for Europe (which could be headed for severe recession) but there is hope that the Middle East producers might be able to close the gap from European countries moving away from Russian supply. Still, years of underinvestment in fossil fuels and nuclear energy are proving to be challenging for Europe over the short run. Most of Europe would be considered Developed Markets (DM, vs Emerging Markets or EM). Much of the emerging world is ramping up investment in nuclear plants with upwards of 300 planned over the next decade. The U.S. currently has 95 nuclear plants in operation with perhaps two coming online this year. Nuclear is gaining more and more attention because despite the risks most people fear, it may not be as lethal as believed. Bjorn Lomborg of the Copenhagen Consensus Center notes that mortality rates are vastly higher from fossil fuel emissions than from accidents or operations of nuclear facilities.
As always, we encourage investors to make decisions over time vs overnight and to take historical patterns into consideration when making their investment decisions.
The First Wealth Management is located at First Florida Bank, a division of The First Bank, 2000 98 Palms Blvd, Destin, FL 32541. Branch offices in Niceville, Mary Esther, Miramar Beach, Freeport, and Panama City. Phone 850.654.8122.
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