Managing Interest-Rate Risk
After much telegraphing that it would do so, the Federal Reserve raised interest rates this week by 25 basis points–and signaled that there are more to come . Of course, the stock and bond markets have already priced in several interest-rate hikes in 2022. That’s at least partly why growth stocks have struggled as much as they have this year and why high-quality bonds are in the red for the year to date.
But perhaps the Fed’s action is just the kick in the pants investors need to examine the interest-rate risk of their portfolios. My colleague Christine Benz offers some tips for figuring out whether your portfolio is ready for rising interest rates . Ben Johnson explains whether you should be worried about how your dividend-paying stocks may perform in a rising-rate climate. And put your bond funds through a duration stress test to see how they may respond to ongoing rate hikes. 8 Must-Own Stocks
For some things in life, we seek stamps of approval. Maybe we’ve built a proposal for a new product idea, hopeful that upper management will put together a small team to explore it further. Or we make a new recipe and are encouraged when our often-mum teenagers say how good it is. Or we decide to use a certain contractor for our bathroom remodel because two neighbors had good experiences–and now have stunning bathrooms.
Similarly in investing, knowing that a well-respected money manager owns a stock that you own–or a stock that you’re eyeing–can serve as a stamp of approval. So in my Our Picks column this week, I turned to some of our favorite concentrated-fund managers–seven in all, covering the growth-to-value spectrum–for stock ideas. Specifically, I focused on stocks that at least three of the managers owned; eight stocks made the cut. Six of the seven managers own Alphabet ( GOOGL ), which we think is undervalued today. Find out the other seven stocks these managers have in common. Emerging-Markets Fund Woes
“Investors in emerging-markets stock funds have been hit with a one-two punch,” wrote my colleagues Katherine Lynch and Lauren Solberg in a column this week. Punch one: the collapse of the Russian market after Russia invaded Ukraine. Punch two: freefalling Chinese stocks amid a growing dispute between China and U.S. regulators. As I write this, diversified emerging-markets stock funds are down more than 16% this year. (Of course, given the extreme market volatility, they may be up 16% by the time you’re reading this!)
Are emerging-markets stock funds worth the risk? My colleague John Rekenthaler thinks not. John has pointed out that emerging-markets stocks have lagged over most periods, offer less diversification benefits than they have in the past, and have “suspect” expected returns. “It is not clear that buying a package of stocks from countries labeled as ‘emerging’ makes more sense than, say, buying one from countries whose names begin with the letter B,” quips John. He instead suggests sticking with wider-ranging funds where managers can decide where the risk might be worth taking; emerging markets aren’t an asset class all their own, he concludes.
Those who beg to differ should review this article from Morningstar senior analyst Dan Sotiroff . Dan runs through the various risks inherent in emerging-markets stock investing and suggests how to mitigate them. Stock of the Week: Starbucks
Starbucks ( SBUX ) CEO Kevin Johnson announced his retirement effective April 4; former CEO Howard Schultz will temporarily retake the reins of the coffee chain until a long-term successor is named, most likely by fall, according to the firm. Expecting strategic continuity, we maintained our $106 fair value estimate and Exemplary Morningstar Capital Allocation Rating of the firm, said analyst Sean Dunlop .
“Starbucks’ incoming CEO will have plenty on their plate, with sharp increases in commodity and labor costs figuring to pressure operating margins through at least the next two years,” he noted. “The organized labor movement also figures to attract management attention, while periodic operating disruptions in China add another degree of execution risk.” Shares rallied on the news, but the wide-moat stock still looks undervalued to us as of this writing. Another Plug for Morningstar’s Tax & IRA Guide
Regular Smart Investor readers are no doubt tired of my promotion of Morningstar’s 2022 Tax and IRA Guide . But I also suspect that many of you still have some dangling tax issues. For some, it may be getting your 2021 taxes filed. For others, it may be actually investing that IRA that you […]
Managing Interest-Rate Risk