Indeed, I am long Exxon Mobil (XOM) as a dividend aristocrat that will benefit from greater oil price stability. And while client portfolios stopped out of a profitable position in UBS MLP Alerian Infrastructure (MLPI) back in October, I may revisit the theme of energy infrastructure in the near future. If any sector could benefit from an unquestioned ascent on a “wall of worry,” it could be energy. Or, in contrast, energy could supplant the tech sector circa 2000-2002 and the financial sector circa 2007-2009.
A great deal would depend on how Fed policy acts in the face of domestic and global economic deceleration. Will it be the dovish Fed that has maintained zero percent interest rates throughout the six-year bull market? Or will it be a more determined Fed that wants to give itself more breathing room by raising short-term rates, so that it does not need to sign on for QE4?
Regardless, investors that have been suckered in by endless promises of rising interest rates need to recognize the unanimous refrain is almost always incorrect. Last year’s Bloomberg poll of the top 55 economists found that all 55 expect the 10-year yield to rise from 3.0%. The average forecast? 3.4%. Only a few folks like myself pointed to the relative value of U.S. treasuries compared with lesser quality sovereign debt abroad as well as the global economic slowdown. As we all know now, the 10-year fell to 2.2% from 3.0%.
The economists are at it again. Nearly all of them say the 10-year yield will go higher, with an average forecast of 3.0% by 2015 year-end. I think the 10-year yield will probably be closer to 2%, especially with comparable German bunds below 1% and Japanese government 10-year bonds at 0.31%. Just like last year, I am quite content to keep utilizing longer-duration treasuries in funds like Vanguard Long Term Government Bond (VGLT) as well as iShares 10-20 Year Treasury (TLH), as the yield curve continues to compress. Most of my clients have exposure to Vanguard Extend Duration (EDV), though I would look for a bit of a shakedown before considering the longest end of the curve.
Bottom line? Check your bond bearishness and stock bullishness at the door. Let the trendlines do the talking for both assets. For now, the bond “wall of worry” and the “stock wall of worry” are not as important as the definitive uptrends for the assets. One should let the uptrends in a stock stalwart like iShares USA Minimum Volatility (USMV) as well as a bond winner like Vanguard Long Term Government (VGLT) speak for themselves.
