Who is TINA and what does she mean for my portfolio?

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Some investors argue further rate cuts are needed. They contend that the global economy is slowing, global manufacturing is in a recession, $15 trillion in global sovereign debt is yielding negative rates, inflation is nowhere to be seen and the U.S. dollar is too strong. On the other hand, the U.S. service-driven economy is still on sound footing; employment is robust, with the latest initial jobless claims dropping 8,000 to 209,000 and consumer confidence in July surging to levels near last fall’s record highs. It is unclear if interest-rate cuts effectively will address any of the global economic woes. After all, won’t other countries just to continue to lower their rates in a race to the bottom? And if necessary can’t the tariff war be resolved quickly with executive action?

As worried investors pile into bonds, driving prices up and yields down, it actually make stocks more attractive because dividends and earnings are now discounted at lower rates. For example, as of June 28, 2019, the 2.00% yield on the ten-year U.S. Treasury note equated to an S&P 500 price-earnings (PE) multiple of 50, i.e., 50 times reported next twelve months’ earnings divided by the S&P 500’s market capitalization.[1] At that same juncture, the S&P 500’s forward twelve-month earnings yield (EP),[2] which is the inverse of the PE multiple, stood at 5.97%, equivalent to a PE of 16.7 without even considering dividends. In our view, this difference between equivalent PEs — 50.0 vs. 16.7 — may point to a potentially attractive opportunity.

Earnings estimates have been cut but they are still hanging in there, and we expect to see higher levels in 2019 than the blockbuster 2018. Advancing earnings and continuing low interest rates may bolster the case for stocks. With global rates so low, you may have heard the acronym TINA — there is no alternative. We believe there is an alternative: global diversification of both stocks and bonds to help cushion the ride of volatility.

Please see page 20 of the Global Perspectives book for a comparison of the earnings yield between U.S. Treasurys and S&P 500 stocks, and watch Matt Tom’s latest comments about the trade wars.


[1]Source: Standard & Poor’s, First Call, Reuters, Bloomberg, FactSet.
[1]Earnings yield is the inverse of the price to earnings (P/E) ratio and is calculated as the sum of the reported next 12 months’ earnings estimates divided by market capitalization. The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. Past performance is no guarantee of future results. An investment cannot be made in an index.

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