Call #1: Maintain long-term overweight global equities
In December, equity markets exhibited a marked improvement, which has continued into 2012.
What has changed from last November’s sell-off? Two developments in particular.
First, while Europe is far from out of the woods and is probably already in a recession, one risk that has decreased is a liquidity crisis in the European banking sector. By extending unlimited loans to European banks for up to three years, the European Central Bank has helped ensure that banks have adequate funding and has mitigated the risk of a banking crisis.
Second, there’s been a steady stream of better-than-expected economic data lately, particularly in the United States. Just last week, the monthly Institute for Supply Management (ISM) report came in at its highest level since April. As I’ve mentioned before, the ISM report is a good leading indicator for the broader US economy and the latest better-than-expected number for December suggests that first-quarter growth will be relatively strong.
Similarly, on Friday, the US non-farm payroll report came in much better than expected, suggesting that a slow improvement in the labor market is continuing and further confirming relatively strong first-quarter growth.
For now, stabilization in the United States is trumping the ongoing threat of Europe and is giving equities some breathing room. As such, I’m continuing to advocate a long-term overweight to global equities. Possible iShares solutions are the iShares High Dividend Equity Fund (NYSEARCA:HDV), the iShares S&P Global 100 Index Fund (NYSEARCA:IOO), the iShares S&P 100 Index Fund (NYSEARCA:OEF) and the iShares Dow Jones International Select Dividend Index Fund (NYSEARCA:IDV).
Call #2: Maintain overweight municipal bonds
This time last year, we were treated to some fairly dire predictions for the municipal market. Turns out, these predictions never quite materialized. In fact, municipals were one of the best performing asset classes in 2011. As we head into 2012, I continue to favor municipals within the fixed income segment for a few reasons.
First, despite municipal’s 2011 rally, the spread between municipal bonds and Treasuries is now the widest since 2009. This is as much a reflection of Treasuries being expensive as it is evidence that municipals are cheap. Still, current spreads do offer investors an opportunity for a significant after-tax pickup in income.
Second, municipal finances continue to improve, with state revenues up approximately 4% in 2011. Finally, I believe municipals can continue to outperform the broader fixed-income segment. My preferred way to access munis is through instruments such as the iShares S&P National AMT-Free Municipal Bond Fund (NYSEARCA:MUB) and the iShares S&P Short Term National AMT-Free Municipal Bond Fund (NYSEARCA:SUB).
Disclosure: Author is long IOO and MUB.
Disclaimer: In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. There is no guarantee that dividends will be paid. Bonds and bond funds will decrease in value as interest rates rise. A portion of a municipal bond fund’s income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains, if any, are subject to capital gains tax.