As the second quarter of 2015 gets underway, Legacy’s investment team collectively discussed aspects of the securities market in review, as well as what they will be watching going forward.
Q: For the first time in 15 years, the Nasdaq index reached a major milestone in March when it crossed the 5000 mark for the first time since March of 2000. How will this affect your thoughts for the rest of the year?
A: When the Nasdaq index was at record highs at the turn of the century, it was because technology stocks were red hot. Today, some of the best performing stocks are biotechnology companies like Gilead Sciences, Amgen, Celgene, and Biogen and they are included in the index. At the end of the day, we don’t pay close attention to a particular index level, and buy what we think are good companies at an attractive price.
Q: What has been done to prepare for interest rate hikes that are projected to occur sometime mid-year?
A: The disappointing payrolls data that came out Friday, March 20, will likely give the Fed more time to raise rates, potentially delaying rising rates until this fall instead of this summer. A rising rate environment is not necessarily bad for equities; it might actually be a healthy sign that the economy is improving. Additionally, long duration bond funds might experience significant price declines if we see a sharp move to higher rates that could be a catalyst to send some bond investors back to equities on the margin. From a portfolio standpoint, we think it pays to keep the bond portion to a duration of less than five years; the extra yield pickup from buying long bonds isn’t worth the risk.
Q: What is your current position on international stocks and how they may perform during the remainder of 2015?
A: The year started well for international stocks but we have been there before. In the last few years we have seen a strong start to international stocks end up in disappointment for the rest of the year. One thing that is different this year is the start of the quantitative easing program (QE) by the European Central Bank (ECB). The extra liquidity infusion by the ECB might be what the international stock markets need to jump-start a strong rally in 2015 that is sustainable. Markets don’t go up because they are cheap; you need a catalyst and hopefully QE from the ECB will be the spark.
We continue to believe that there is more value in international versus domestic stocks, particularly in emerging markets. Legacy’s investment philosophy has tended to steer towards emerging markets for international exposure—only in our more recent history have we invested in developed international markets. Although the diversification benefits for holding international equities is minimal, to us it looks like a great place to be positioned for the long run.
Q: When you reflect on your outlook for 2015 as the year began, and considering how the year has unfolded so far, has your outlook or focus changed?
A: Our outlook remains largely the same as many of the themes in 2015 are a continuation of what we saw in 2014. A strong U.S. dollar, Fed policy, energy prices, and tough earnings comparisons will continue to dominate headlines. One area in particular that we will be watching is the strong US dollar. We would expect to see earnings weakness in S&P 500 companies who receive a significant percentage of their revenue from outside the US if the dollar continues to remain strong compared to other currencies. We also expect our small and mid-cap positions to perform better than large domestic companies because they have less currency exposure.
Q: In general, what are the indicators you are keeping the greatest eye on this year that will affect equity stock selection?
A: We have started to see some weakening in the economic data but part of the soft patch might be attributable to tough winter weather. We still expect a positive, and solid, 2015 GDP number. Legacy’s expected return model still has the equity market as fairly valued and we expect solid returns of about 7% for the next 10 years. For portfolios that aren’t expecting to incur fund withdrawals in the next decade, we think the best place to be is in stocks.