One might also want to remember that the 2.14% yield on the 10-year Treasury Note is a far better value than the Japanese 10-year at 0.40% or the German 10-year at 0.53%. Why wouldn’t foreign dollars flow into U.S. sovereign debt that represents a substantially higher yield at equivalent quality? Add to the equation that U.S. government obligations come in U.S. dollars that are likely to rise in value or maintain their value against the yen or the euro going forward.
Second, safer haven currencies like the dollar and the Swiss franc still have the wind at their back. Specifically, virtually all of the world’s central banks are aggressively easing borrowing costs and/or seeking to devalue. The yen continues to hit new multi-year lows; the euro is within shouting distance from revisiting its bottom in March. While it is true that most of the damage to currencies across the globe may already be “priced in” – while it is likely that financial markets anticipated dollar and franc strength in advance of present-day government actions – the greenback still gets the nod during periods of economic uncertainty. Other than “carry trade” reversals when those who borrowed the euro to invest in U.S. assets are forced to repay those loans, investing in the dollar remains fundamentally and technically sensible. PowerShares Dollar Bullish (UUP) and WisdomTree Dollar Bullish (USDU) should be a consideration as long as the respective uptrends hold.
Third, and perhaps most critically, what can investors expect from stock assets in the weeks and months ahead? A whole lot of sideways movement. The tailwinds? Stock buybacks and dividends remain a robust area of support; strong technical uptrends are in force and economic uncertainty may push the Fed’s plans for lift-off further out into the future. Unfortunately, the headwinds are equally venerable. Nearly every valuation metric in existence indicate over-inflated pricing. Corporate profitability has been waning, sales have been stalling and complacency is festering. One study demonstrated that the year-to-date trading range for the Dow Jones Industrials is the 4th lowest in 115 years.
It follows that client stock exposure has not changed much since January 1. Long-time readers recognize the list of many of our top positions including, but not necessarily limited to: iShares S&P 100 (OEF), SPDR Select Health Care (XLV), PureFunds ISE CyberSecurity ETF (HACK), iShares USA Minimum Volatility (USMV), iShares MSCI Currency Hedged EAFE (HEFA) and Vanguard Europe Pacific (VEA). We also maintain an average client cash level of 10%-15% for opportunistic purchases in the next meaningful market pullback.