I recently heard the prominent money manager, Leon Cooperman, make a funny but relevant quote.  He said,

“If 100% of my portfolio is at 52-week highs then I am a momentum chaser.  If 100% of my portfolio is at 52-week lows, I’m out of business.”

The point Cooperman was making is that when building a portfolio, one needs to have some investments working now and some that will work later.

With respect to the latter, it becomes part of diversification.  Of course, the one little problem in all this is choosing the investments that actually will work now and later.  The process of investment selection is, after all, a practical pursuit.  One holding in the managed accounts that has underperformed in recent years is the position in securities that will appreciate if long-term interest rates rise.

For a variety of reasons, including the lackluster performance of the economy, Federal Reserve policy, and investor fears of one sort or another, interest rates have remained very low.  My view is that interest rates have been in a bull market for 35 years and that run is almost over.

Interest Rates and Inflation

Keeping interest rates low is a tactical move the Federal Reserve is taking in order to achieve the strategic goal of stimulating the economy and, in turn, creating some inflation. The Federal Reserve has a target of a 2% rate of inflation.

Why inflation?  Inflation allows companies to raise prices, increase profits, and increase capital spending and employee wages.  Another not so publicized benefit of inflation is that a country can more easily service its debt if the inflation rate exceeds the borrowing cost.

Inflation increases government revenues while borrowing costs are fixed.  In an era of high borrowing, a little inflation is very welcome to those that owe money including the US government.

Remember, the interest rate is the price of money.  If inflation means a general rise in prices, interest rates should go up as well.

Investing is not easy.  It is hard enough to find a stock or bond that will rise in value.  It is harder still to figure out when it will rise.  This is why a good portfolio has a range of investments that will appreciate over time but probably not all at once.!

The stock market has continued to show strength in the face of conflicts in Iraq and Ukraine.  Last month, small-cap stocks were under pressure but since then have rebounded nicely.  Oil and gold have been strong due mostly to global conflicts.

Industrial commodities have also proved resilient in light of tepid data coming out of China.  I have written in this column that China is the most important piece of the global economic story.  China doesn’t have to grow as it did, but the global economy needs it to be stable.  The firmness of industrial metals may be evidence of stability.

This, with Europe improving and India maybe accelerating could help keep the bull running.

— Ian Green, Pendragon Capital Management

Subscribe to Pendragon's Newsletter

Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.