Whether it’s The Marshall Tucker Band, Waylon Jennings or Rick Santelli, the question has remained: Can’t you see, what that woman’s been doing to me?
In the contemporary moment, that woman is Federal Reserve Chair Janet Yellen.
According to the minds at work within behavioral finance, a prominent bias in today's financial mind is that of recallability or the notion that it is difficult to make rational decisions when events of significant emotional weight occur near the time of one's decision. Fall 2008 was one of these emotional events. As a result, separating ourselves from the Lehman Brothers debacle and the rest of the financial fallout of 2008 has been nearly impossible despite unemployment figures that are under six percent and six years of long, slow separation.
Today, we are in a rate predicament. The U.S. dollar is strong, other central bankers are driving their own rates lower and our economy is showing signs of a full recovery. As an investment advisor helping individuals with goal-based wealth management, we feel like pawns in a faraway game of chess. Chair Yellen has insisted rates will remain low for as long as necessary to ensure the U.S. economy continues to grow, which is an understandable position; however, the effects of the Fed's decision(s) are felt by all Americans who are setting financial goals.
Here are a few problems for advisors helping clients swim upstream to generate income in this environment:
- Utilities are trading at rich valuations: the SPDR Utilities ETF trades at an 18 trailing P/E (as of February 26, 2015) versus the SPY which tracks the broader S&P 500 index and has a 17 trailing P/E. Folks are paying up for the 3.12 percent yield.
- Master Limited Partnerships have suffered along with oil: the Alerian MLP ETF, a basket of master limited partnerships, is 12.5 percent below it’s 52-week high and sports a 6.62 percent dividend yield. However, that yield comes at a price: the trailing P/E is 23 and the safety of those dividends is not guaranteed given oil prices that have been cut in half since last year.
- Technology companies, as a category, have the most cash and therefore, safer dividends. However, is the specific tech company discussed IBM who missed the most recent phase of tech growth or Apple who is now the world’s largest company in history?
- There is a 99 percent probability the Fed will raise rates in the next 12 months and when rates rise the bonds with the biggest duration are impacted the most. Generating income is best when principal is not lost and Fed action could complicate this process.
Although all of these issues worry investment advisors acting as fiduciaries for their clients, the take away is clear: diversify. Predictions are a fools game, and a proper asset allocation will weather the storm no matter it's strength.
So, Janet, can’t you see what you’re doing to me? If not, at least the wise investor can.