08-20-2014 12:54 PM
By Bernie Williams, chief investment officer
Slowly but surely the U.S. economy is gaining strength. Gross domestic product growth was well above expectations in the latest quarter, and job creation has been at levels not seen since the Clinton years, which has lifted consumer confidence. Now it looks like the important housing sector may also be seeing the benefits.
The federal government said this week that housing starts were up 16 percent in July compared to last July, and that June’s numbers were better than first reported. Year to date, home construction is 22 percent above the same seven months of 2013. Housing was expected to see improvement this year, but the pace has caught the market off guard. Bloomberg reported that July’s housing starts surpassed every estimate in its survey of 75 economists.
No sector of the economy took a harder hit in the Great Recession than housing, with new home starts plummeting 75 percent in 2009. The housing sector is a key provider of well-paying jobs, both directly and indirectly. July’s strong numbers, coupled with the Commerce Department’s forecast that this momentum will continue in the coming months, are key indicators of the country’s improving economic health.
Another potential tailwind for the economy and the consumer is lower energy prices, which you may have already noticed at the pump. Crude oil is at its lowest price in more than a year, which is a little surprising given the geopolitical troubles in the Middle East. The federal agency that monitors energy prices predicts that the average price of a gallon of gasoline will be down to $3.30 by December, more than 10 percent lower than its price in June.
Looking at the financial markets, second-quarter earnings are wrapped up and, in our opinion, they were pretty good. Companies appear to be doing well, with rising revenue and profit growth. Earnings are expected to increase 8 to 9% for the year, which we don’t think anyone ought to complain about.
As the Fed continues to taper, investors will start to focus on the prospects for a Fed funds increase. The forecasted time frame for the increase is still relatively large, but as this worry continues to build, there’s a good chance we’ll see more market volatility. We may even see a lot of volatility, especially when compared to the docile levels of recent months.
USAA Investments Managed Portfolio Outlook
Our view of caution toward U.S. equities remains unchanged — we are underweight U.S. large caps and small caps. While signs point to continued recovery of the U.S. economy, valuations are no longer cheap, and profit margins are near record highs.
We are tactically underweight fixed income, primarily to fund a deployable cash position. Within fixed income, we prefer areas of the market that are more credit-sensitive and less sensitive to changes in interest rates, such as investment-grade corporate bonds and high-yield bonds. The USAA Intermediate-Term Bond Fund and the USAA High Income Fund fit this profile.
We are overweight to assets that are positively correlated to inflation expectations. The USAA Real Return Fund provides potential protection against the risks of long-term inflation.
We are overweight non-U.S. developed markets and emerging markets based on relative valuations. Though they have been hit especially hard recently, we believe that emerging markets remain attractive. Along with compelling valuations, they offer an interesting long-term prospect for growth. The USAA Emerging Markets Fund offers exposure to stocks in less-developed countries.
As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are best suited for your individual goals, objectives, risk tolerance and time horizon.
This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing.
Consider the investment objectives, risks, charges and expenses of the USAA mutual funds carefully before investing. Download a prospectus containing this and other information about the funds from USAA Investment Management Company, Distributor. Read it carefully before investing.
Investing in securities products involves risk, including possible loss of principal.
Past performance is no guarantee of future results.
Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and political instability.
As interest rates rise, existing bond prices fall.
The S&P 500 Index is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all stocks publicly traded in the United States. Most of these stocks are listed on the New York Stock Exchange.
A widely recognized index of investment grade tax-exempt bonds. The eight subsets of the Index are market weighted. The Index includes general obligations, revenue bonds, insured bonds, and pre-refunded bonds.