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Top Investment Ideas For 2015

The U.S. stock market will continue to build upon its secular bull market rally in 2015. Maintain overweight to the U.S. Consider asset classes and sectors that should benefit from rising interest rates. REITs should continue to perform. Bonds can still be effective for income and growth-oriented portfolios. I believe that the U.S. stock market will continue to build upon its secular bull market rally in 2015, and post a positive return, potentially even in the high single digit range, for the year, though there will likely be several more periods of short-term volatility over the course of 2015, similar to what we have seen thus far in January. As a result, I suggest the following portfolio management ideas for careful and thoughtful consideration for the New Year remembering that any investment portfolio should be custom tailored to an investor’s specific financial goals, income needs, investment timeframe and tolerance for risk. · Maintain overweight to the U.S. The U.S. appears to be positioned for the most upside potential in 2015, especially during the first half of the year, in comparison to other developed and emerging market countries for the following reasons: o Our contention that we are in the midst of a secular bull market and any intermittent market pullbacks may help to fuel the next leg(s) of this bull market cycle. o The U.S. economy currently resides as the “shiny city on top of the global economic hill” and should continue to generate a majority of capital inflows. o Europe appears to be struggling with how best to navigate out of their own economic recession and it may take longer for Europe to show consistent signs of economic growth than many originally forecasted though I still believe that international stocks (particularly within Europe and also including certain emerging markets) are an attractive asset class for the intermediate term, however, I expect better risk adjusted, relative performance potential over the near term in certain U.S. equity asset classes and sectors. · Consider Asset Classes and Sectors that have Historically Benefited from Improving Economic Conditions accompanied by Rising Interest Rate Environments I believe it is an appropriate time to consider making adjustments to investment portfolios to brace for the reality that interest rates will inevitably start rising, though yields may rise before any such interest rate increases if investors continue to increase allocations to bonds and thereby push up their prices. Recognizing that past performance is not a guarantee of future results, according to research report from Capital Innovations entitled, ” Most Bonds and Some Stocks Could Suffer from an Increase in Long-Term Rates “, areas such as senior loans/floating rate notes, convertible securities, high yield fixed income and certain sectors of common stocks; such as Materials, Information Technology, Energy, Consumer Discretionary and Industrials, have generally benefited historically from rising interest rate market environments ( measured for these purposes as the price impact of a 1% increase in 10-Year US Treasury rates ) during the timeframe of 1994 – 2013. We also conducted our own research at Hennion & Walsh observe which sectors performed best when the Federal Reserve embarked upon their last measured rate increase program during the years of 2004 – 2006, which I contend is the likely blueprint they will follow this time around. As you may recall, during this timeframe, the Fed raise the Federal Funds Target Rate by 25 Basis Points (i.e. 0.25%) on seventeen different occasions. Our research interestingly showed that the top performing sectors of the stock market during this time period were Energy, Utilities, Telecommunication Services, Financials ( led by REITs ), Materials and Industrials. · REITs Should Continue to Perform Many have been leery to increase allocations to Real Estate Investment Trusts (REITs) due to fears over the impact of rising interest rates on the housing market and mortgage REITs in particular. To this end, it is important to recognize that REITs are not just related to the housing market and all REITs are not Mortgage REITs. In fact, the largest component of the REITs market is not associated with Mortgage REITs, but rather is associated with Retail REITs. Other sectors of the REIT market include diversified REITs, industrial REITs, hotel and resort REITs, office REITs, residential REITs, health care REITs and specialized REITs ( including self-storage facilities ). Certain REIT sub-industries appear to be positioned well to perform in a rising rate environment for the next few years under the presumption that the Fed would not consider raising interest rates unless they believed that the U.S. economy was on a firm footing and expanding moderately well, even if the housing market is not growing as rapidly. Additionally, REITs have demonstrated that they have performed well during previous periods where the Fed has gradually raised interest rates. For example, during the previously discussed timeframe of 2004-2006, the Fed raised the Federal Funds Target Rate on 17 different occasions in 25 basis point (0.25%) increments, U.S. publicly traded REITs, as measured by the Wilshire REIT Index, experienced an average annual total return of 27.7%. Year # of Fed Fund Rate Increases Wilshire REIT Index Total Return % 2004 5 33.2% 2005 8 13.8% 2006 4 36.0% Data Source : Wells Fargo Advisors. Past performance is not an indication of future results. You cannot invest directly in an index. The Wilshire REIT Index measures U.S. publicly traded Real Estate Investment Trusts. The Wilshire US REIT Index (WILREIT) is a subset of the Wilshire US Real Estate Securities Index (WILRESI). · Remember that Bonds can be Effective for Income and Growth-oriented Portfolios It has long been our contention at Hennion & Walsh that, for income-oriented investors, bonds can provide for a dependable and consistent stream of income, and principal protection when held to maturity. Bonds, whether they are Municipal, Government or Corporate bonds, can also provide for compounded growth opportunities when the income received from the bonds is reinvested. Additionally, for growth-oriented investors, fixed income securities can provide investors with downside protection and diversification within a growth portfolio, especially in a highly volatile market where additional, measured, short-term flights to quality are likely. In our view, investors should be careful not to miss out on the income and diversification opportunities offered by bonds by trying to time future, potential changes in interest rates. History has shown us that trying to time the market, or time interest rate increases or decreases, is often an exercise in futility. With this said, it is important to understand that when interest rates do increase, bond prices may fall and yields may rise. However, rising interest rates should not impact the interest that bond holders receive on their bond holdings nor should they change the ability of these investors to receive par value on their bond holdings at maturity. Bond fund investors, on the other hand, may see the interest they receive on their fund holdings change in a rising rate environment and will not receive par value at maturity as there generally is no set maturity on bond funds. While allocations to bonds may vary based upon market conditions and investor objectives and risk appetites, certain types of bonds, from certain types of issuers, can still find a home in most investment portfolios throughout most market cycles. Please note : Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above. This posting is provided for informational purposes and is not a solicitation to buy or sell any of the investment strategies or companies discussed. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

iShares Core S&P Small-Cap ETF: IJR’s 2014 And Fourth-Quarter Performance And Seasonality

Summary The iShares Core S&P Small-Cap ETF ranked No. 3 in 2014 among the three most popular exchange-traded funds based on the S&P 1500’s constituent indexes. Most recently, the ETF’s adjusted closing daily share price last month ballooned to $114.06 from $110.85, a swelling of $3.21, or 2.90 percent. Seasonality analysis indicates the fund may move to relative weakness in the first quarter from absolute strength in the fourth quarter. The iShares Core S&P Small-Cap ETF (NYSEARCA: IJR ) ranked third by return during 2014 among the three most popular ETFs based on the S&P 1500’s constituent indexes, as it was handily outdistanced by both the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) and the SPDR S&P MidCap 400 ETF (NYSEARCA: MDY ). Measured by adjusted closing daily share prices, IJR progressed to $114.06 from $107.76, a yield of $6.30, or 5.85 percent. As a result, the small-capitalization ETF lagged the large-cap SPY by -7.62 percentage points and the middle-cap MDY by -3.55 percentage points. However, role reversal in the fourth quarter had IJR leading SPY by 4.90 percentage points and MDY by 3.49 percentage points, as the small-cap ETF soared $10.18, or 9.80 percent. Accounting for its three-to-one share split in 2005, IJR intraday Dec. 31 hit an all-time high of $115.74, a level I consider important because of its proximity to the estimate presented in my “SPY, MDY And IJR At The Fed’s QE3+ Market Top” last March. With the U.S. Federal Reserve actually announcing the end of its latest quantitative-easing program, aka QE3+, Oct. 29 and potentially announcing the beginning of its interest-rate hikes April 29, market participants may be more likely to sell than to buy IJR this quarter. It is worth noting in this context that the Fed’s conclusion of asset purchases under its first two formal QE programs this century is associated with bear markets in small-cap equities , as evidenced by the iShares Russell 2000 ETF (NYSEARCA: IWM ) sliding -21.43 percent in 2010 and -30.78 percent in 2011. Figure 1: IJR Monthly Change, 2014 Vs. 2001-2013 Mean (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance . IJR behaved a lot worse in 2014 than it did during its initial 13 full years of existence based on the monthly means calculated by employing data associated with that historical time frame (Figure 1). The same data set shows the average year’s weakest quarter was the third, with a relatively small negative return, and its strongest quarter was the fourth, with an absolutely large positive return. Generally consistent with this pattern, the ETF last year booked a huge loss in Q3 and a huge gain in Q4. Figure 2: IJR Monthly Change, 2014 Vs. 2001-2013 Median (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance. IJR performed even more worse in 2014 than it did during its initial 13 full years of existence based on the monthly medians calculated by using data associated with that historical time frame (Figure 2). The same data set shows the average year’s weakest quarter was the third, with a relatively small positive return, and its strongest quarter was the fourth, with an absolutely large positive return. It also shows there is no historical statistical tendency for the ETF to explode in Q1. Meanwhile, the small-cap category of the equity market continues to look grossly overvalued, with the Russell 2000’s price-to-earnings ratio on a trailing 12-month basis calculated as 61.83 Jan. 2, according to Birinyi Associates data published by The Wall Street Journal . Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.

A Market Needing To Resolve Divergences In 2015

As 2014 has come to a close, investors have turned their attention to 2015 and looking for clues as to what the market and economy have in store for the new year. Below are divergences that unfolded in 2014 which raises the question of how they will be resolved this year. The resolution of these divergences will likely have implications on the performance of an investor portfolios this year. Oil Prices Knowing the stock market is not the economy and vice versa , determining factors contributing to the significant decline in oil prices is important. Certainly, increased supply is influencing the decline in crude prices. Equally though, as we have noted in several earlier articles, we believe lack of demand is also a contributing factor. The importance of the reduced demand leads strategists to raise the question of whether the global economy is entering a slowdown. To date, the U.S. seems to have shaken off the potentially negative impact of slowing economies outside its borders. Given the interconnectedness of the economic world today though, can the U.S. continue on its growth path while many other economies in the developed and emerging world struggle with growth? As the below chart indicates, historically, falling oil prices have been associated with slowing global GDP. Aubrey Basdeo, Managing Director at Blackrock, noted the potential negative impact of an extended run of low oil prices in an article late last year titled, Free Fallin’ . The article’s conclusion, Wherever the price ends up, it’s likely it’ll stay there for a while. We don’t see demand increasing, especially with China cooling off. In the short-term that could be good news for our economy – lower gas prices mean people have more money to spend – but it remains to be seen just how our country will be impacted by a sub-$60 oil price. The longer it stays low, though, the more difficult things could get. Highlighted in the Felder reference below was a comment by Howard Marks’ in a recent investor letter , “It’s historically unprecedented for the energy sector to witness this type of market downturn while the rest of the economy is operating normally. Like in 2002, we could see a scenario where the effects of this sector dislocation spread wider in a general ‘contagion.'” High Yield Bonds: Reduced Investor Risk Appetite The performance of high yield bonds has an above average positive correlation to the performance of equities. In short, as the economy grows, companies tend to experience better earnings growth. This improved earnings outlook generally leads to improved equity returns. Broadly, as companies generate better earnings growth, highly leveraged ones tend to experience an improved outlook as well. This in turn reduces the risk of default with highly leveraged companies. Consequently, high yield bond prices are bid up as investors are attracted to the higher yields provided by high yield debt in an environment where default risk seems lessened. A recent article by Jesse Felder of The Felder Report took an in depth look at the long term and short term price movements of high yield (NYSEARCA: HYG ) relative to a riskless 3-7 year Treasury ETF (NYSEARCA: IEI ) and the S&P 500 Index . As the first chart below shows, the high yield relative to treasury bond investment tracks closely with the S&P 500 Index. Felder notes in his article, Clearly, the chart above demonstrates that the strength in junk risk appetites led stocks off the lows back in 2009. Over the past summer, however, junk bonds started to lag stocks for the first time since the bull began (or lead lower, depending on your perspective). Since then the divergence has only gotten wider with each subsequent new high in the stock market [as seen in the below chart]: Large Caps Versus Small Caps And The Dollar The one asset allocation decision investors and advisers needed to get right in 2014 was to overweight U.S. equities, large caps more specifically, versus broad international. As can be seen in the two charts below, U.S. large cap stocks had a decisive performance edge versus developed international (NYSEARCA: EFA ), emerging markets (NYSEARCA: EEM ) and small cap equities (NYSEARCA: IWM ). With economies currently weaker outside the U.S. and interest rates lower in many European countries, foreign investors have allocated investment dollars to the U.S. This flow of funds into the U.S. has contributed to downward pressure on U.S. interest rates as well as continued upward pressure on the U.S. Dollar. The top chart above shows a longer view of the trade weighted US Dollar and its recent strength, although strong shorter term, the strength does not look exhausted when viewing the longer term chart. The implication of a stronger dollar has to do with the potential earnings headwind for large multinational companies. In a slow growing economy, the currency headwind can take a bite out of corporate profit growth. If this occurs, small and mid size companies are less exposed to exchange rates as business for these companies is mostly generated domestically. Lastly, the U.S. equity markets opened higher on the first trading day of the new year, but quickly turned lower near the time the ISM Manufacturing Index was reported. The manufacturing index was reported at 55.5 which was below consensus expectations of 57.5. This was the slowest rate of monthly growth in six months. Econoday noted, “growth in new orders slowed substantially, to 57.3 from November’s exceptionally strong 66.0, while backlog accumulation also slowed, to 52.5 from 55.0. Production slowed to 58.8 vs. 64.4….The abundant run of manufacturing reports point to year-end slowing in a sector which is oscillating going into the New Year.” The above highlights are just a few divergent factors that have developed recently. From a positive perspective, the equity markets have a tendency to climb the proverbial ” wall of worry .” We will cover more of our thoughts on these topics in our upcoming year end Investor Letter.