The busy season for outlooks

Economists and money managers give forecasts because people ask them to, and this is the time of year when people like me ask people like them for their forecasts.

You have to take all forecasts with a grain, if not a block, of salt. Nevertheless, I got the chance to interview some smart people, such as Will Danoff, manager of Fidelity Contrafund, who’s bullish on the U.S. and technology. And then there’s Jerome Dodson, manager of Parnassus, who has the crazy notion that companies that treat employees well will prosper.

Anyway, here’s their outlooks for 2018, along with Mark Mobius of Franklin Templeton, Robert Doll of Nuveen and Joe Davis of Vanguard.

A change of heart

A Christmas Carol is about a change of heart — in this case, the heart of Ebeneezer Scrooge: 

Oh!  But he was a tight-fisted hand at the grind- stone, Scrooge! a squeezing, wrenching, grasping, scraping, clutching, covetous, old sinner!  Hard and sharp as flint, from which no steel had ever struck out generous fire; secret, and self-contained, and solitary as an oyster.  

The spirit of Scrooge — pre-haunting Scrooge — has been alive and well in American business for a good many years. Just as Scrooge rolled up the profits of his lending business while his clerk froze, U.S. companies have only grudgingly doled out wages. The chart, left, shows average weekly wages, adjusted for inflation, the past decade. Annual rate of increase: 0.52%.

At the same time, profits, cash and profitability at major U.S. corporations have been hitting new highs. This isn’t terribly unusual: Companies typically don’t raise wages unless they have to, and they don’t have to until unemployment falls below 5% or so.

Nevertheless, workers’ share of corporate fortunes have been unusually small, especially in light of productivity improvements. Workers have produced more, but received far less of that improvement than in the past. (Keep scrolling past the graph, because I can’t figure out how to decrease the white space that follows).












The tax reform bill passed by Congress assumes that corporations will pass on their massive tax savings to workers, and also use that extra money to reinvest in other businesses. Will it work? It depends on who you ask, which means that no one really knows. A few companies have already announced bonuses and cited the tax reform measures as their reason for doing so.

Some, such as Wells Fargo, have waffled on whether the increase was because of the tax bill or not. Others, like AT&T, have also announced layoffs at the same time.

Nevertheless, it’s entirely possible that at least some of corporate tax savings will, indeed, make it to employee salaries, new hires or even new factories. Alas, there aren’t many funds that specialize in employee happiness. But here are a few suggestions on what might make a good investment in light of tax reform:

  • Parnassus (PSRNX). This fund takes the position that companies that treat employees well tend to do well in the long run. It’s not infallible — awful companies prosper sometimes, too — but the fund has gained an average of 10.5% a year the past decade, vs. 8.3% for the Standard & Poor’s 500 stock index.
  • Financial funds. Tax breaks plus looser regulation generally should benefit banks. SPDR Capital Markets ETF (KCE) is a good low-cost choice, as is iShares U.S. Financial Services ETF (IYG).
  • KKR & Co. LP. The private equity and real estate manager specializes in merge and acquisitions. Should companies use their newfound cash to buy other companies, KKR is a logical beneficiary.

A cynic would observe that companies have long had the ability to give their employees a raise, and have simply decided to keep most of that cash in the CEO suite. A big infusion of cash from the tax bill could simply increase those tendencies. On the other hand, we can all hope for a change of heart — although, as was the case with Scrooge, the proof was in actions, not theory.



Bear with us

As anyone knows who has tried to use a wireless printer, sometimes things that are designed to make life easier and better just don’t really do either. (In reality, wireless printers are a Luddite plot designed to get us get back to chiseling words in stone. Reliable. Dependable. Eternal!)

The Romans didn't need no stinkin' wireless printer for this.
The Romans didn’t need no stinkin’ wireless printer for this.

But let’s consider mutual funds. The main reason to own a mutual fund is diversification. For example, the Standard and Poor’s 500 stock index is down a bit more than 2% from its all-time high of 2130.82, set May 21. But about 23% of the stocks in the S&P 500 are down 20% or more. (By tradition, a bear market starts at 20%).

If you decided to invest in a mutual fund, good for you! Unless, of course, you invested in the financial equivalent of a wireless printer. Of the 1,764 exchange-traded funds tracked by Morningstar, 441, or 25%, are trading 20% or more below their 52-week high.

Investors in some of these funds, of course, deserve to be spanked. The Direxion Daily Natural Gas 3X fund, which aims to deliver three times the gain (or loss) from the price of natural gas, has plunged 83% this year. And the VelocityShares 3x Long Crude Oil fund, similarly levered to the price of crude oil, is down 76% this year. Remarkably, the VelocityShares has $826 million dollars in the fund.

But some of the funds that have been crushed in the downturn aren’t entirely silly. iShares Emerging Markets fund (ticker: EEM), is off 46% from its 12-month high. While emerging markets are noted for submerging periodically, this is a significant downturn by most measures.

For those who want to take on the energy sector but don’t want to decide which woebegone stock to pick, there’s Vanguard Energy ETF (VDE). If you’re wrong, at least you’ll lose money in an extremely low-cost, tax-efficient way. (The fund also yields 3.1%, so you’ll get a bit of dividend income as well.)

And speaking of dividends, the SPDR S&P International Dividend ETF (DWX), is down 24.2% from its 52-week high. Blame the soaring dollar. Nevertheless, the fund yields 5.33%.

Many of the worst-performing ETFs are simply silly funds that their sponsors trotted out to try and gain some assets. Buying a heavily leveraged commodity fund is just a really, really bad idea. But if you want a slightly less risky way to invest in downtrodden sectors, it’s worth browsing the biggest loser lists.