Investing in this Economy

Nevada business owners and executives can feel good they are in a state that is growing again and in an economy that is expanding. As the economy continues to grind its way upward, a potential tailwind for stocks might be a great rotation out of bonds and into equities.

The makings of this new trend began in 2013 but not on a grand scale. If corporate earnings can keep up with expectations and companies can grow the top line, economic indicators should become more positive and assets such as should begin to rise. In this type of environment, interest rates slowly increase and investors may sell bonds to purchase more stocks.

While many investors are still cautious about where to invest, the United States has revealed itself as one of the safer options, with valuations looking reasonable and poised for growth. Business owners are investing again in both people and capital expenditures. The last several years were all about getting lean and mean to produce good earnings; now CEO’s have been tasked with growing the top line. Capital investments take some time to produce a return on investment so it’s a good sign that there has been more corporate spending on technology, equipment and people.

It’s also a good sign for the markets to see value-oriented companies that pay dividends come into favor. Last year was a year for growth stocks. Smaller companies, in particular, tended to fare better in returns than their large-cap brethren. This year has been different so far and financials are continuing their recent surge.

Overall, the stock market will continue to get support from the new Federal Reserve Chair Janet Yellen. Yellen has openly stated that she and the Fed will continue to support the economy with bond purchases and will provide stimulus if the economy gets in trouble again. For the short term at least, that news is comforting to stock investors—a low interest rate environment helps inflate financial assets. Of course, everyone wants the Fed to provide a soft landing when it ends its bond purchases and to effectively manage interest rates from rising too fast. Hyper-inflation is what some of the fundamentalists are concerned about and the potential decline of the valued U.S. dollar.

In Nevada, cranes are at work again and a resurgence of the economy is beginning to take hold. Gaming stocks have performed well of late, though most of that performance has been driven by the growth of operations in the Far East. Since gaming is a big part of Nevada’s economy, it’s critical that companies such as Wynn, Sands and MGM do well.

One of the challenges the state’s economy still faces is the glut of homes that have yet to hit the market. In Las Vegas, inventory has been low, which has helped move values up. However, many local real estate professionals still believe there is a large inventory to go through that has yet to hit the market. Many of the state’s home sales in recent years involved cash buyers who were looking to buy investment properties. This made it difficult for first-time home buyers to get into the market as bidding wars erupted.

The good news is that many balance sheets are much better than before. This gives hope that Nevada is back in action, which is welcome news.

Jimmy Lee is Managing Partner with The Wealth Consulting Group