It almost never happens that both bonds and stocks take on a significant decline in valuation within a single session. Investors are currently fleeing into cash, and while it makes logical sense over the short-term, I maintain my optimism in equities over the long-term.
What is going on?
The market economy takes a lot of twists and turns. The FOMC’s recent statement wasn’t exactly the easiest bit of documentation to read, but it seems that the Federal Reserve will not raise interest rates until inflation reaches above 2% and the unemployment rate falls below 6.5%. Assuming that is the case, then it’s highly probable that investors would be best served to stay long the stock market, because bond investors will be liquidating Treasury bond securities in order to reduce risk exposure to bonds.
Yes, I called bonds risky; sound like an oxymoron, doesn’t it?
The FOMC committee did not give an exact timeframe for when it would reduce its bond and mortgage backed security purchases. But from the looks of it, the bond purchase program will be cut if economic conditions improve at a rate that beat economic forecasts. So any bit of exceptionally strong economic news, and you can assume that bonds will take a beating that session because it will only further the impression that the economy is strengthening: Therefore, the need to support markets with quantitative easing will no longer be necessary. Longer–dated bonds (ten-year, 30-year) should be avoided altogether in a market environment like this.
Source: Ycharts
The SPDR S&P 500 ETF (which tracks and performs the same way as the S&P 500 does) and the iShares Barclays TIPSBond Fund both declined by over 1% on the session. The volatility in the market was driven by the lack of certainty of being either a bond or a stock investor, so the logical conclusion was to go into cash.
The SPDR S&P 500 ETF gives investors much needed diversification across companies and industries. This helps to lower the risk of being overly concentrated in one sector over another. The SPDR S&P 500 ETF tends to outperform managed funds more than 75% of the time. For those who want the easy way out of picking and choosing investment opportunities, the SPDR S&P 500 ETF may just do the trick.
Two stocks to buy on economic growth
In a growing economy, I tend to favor cyclical stocks rather than non-cyclical. Cyclical stocks have substantially more upside in an environment of inflation and growth. Therefore, investors should consider a position in Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), and The Walt Disney Company (NYSE:DIS).
Silicon Valley a winner
Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) is a well-positioned growth investment. The company isn’t as exposed to product obsolescence, as the company simply manufacturers and delivers chips for other companies. In the future, there are many avenues of growth, and many more applications for semiconductors outside of the traditional personal computer. The most notable trend right now is in the tablet, and smartphone space.
Meg Whitman, CEO of Hewlett-Packard Company (NYSE:HPQ), believes that the tablet will become a product substitute in emerging market economies. It makes sense, because tablet computers are substantially cheaper to manufacture than the traditional personal computer. The Procter & Gamble Company (NYSE:PG) projects 1.4 billion people to enter the middle class by the end of the decade (98% of it will come from the emerging markets.) Therefore, it’s highly probable that tablet demand will grow at the 23% compounded annual growth that Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) projects.
Currently, Taiwan Semiconductor has 45% market share in the foundry segment. The company has enough market share to be a primary beneficiary from the changing market environment. Intel Corporation (NASDAQ:INTC) plans on releasing a pure-play-foundry of its own, but has been met with limited commercial success. Analysts on a consensus basis project that Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) will grow earnings by 15% on average over the next five years. The company pays a 2.7% dividend yield. The stock is 11.38% off its 52-week high and is fairly valued at a 16.2 earnings multiple. I think investors can profit handsomely by buying it on the dip.
The magic of Disney
I believe that investors should never forget that that entertainment will always be in demand. You can’t make entertainment obsolete as it has been around for thousands of years.
The Walt Disney Company (NYSE:DIS) uses its media networks in order to draw awareness to its Disney characters like Winnie the Pooh, Mickey Mouse, and Tigger. The company has a Disney Channel everywhere in the world, and the revenue model of that business is advertising driven. However, the company takes it a step further and builds Disney Theme Parks around these Disney characters.
The company’s theme parks have been able to attract hundreds of millions of visitors, and it is currently the company’s fastest growing segment. The company’s parks and resorts segments grew revenues by 14% year-over-year in the most recent quarter. That specific segment was also able to grow operating income by 73% year-over-year.
The company uses media to build an identity around its intellectual property and brings it to life using real estate. The company has $75 billion in assets and has more in assets than any other media company in the world. Out of all the publicly traded companies in the United States, Walt The Walt Disney Company (NYSE:DIS) ranks in the top 97th percentile in assets.
Analysts on a consensus basis anticipate this company to grow earnings by 12.37% on average over the next five years. The company pays a 1.15% dividend yield to investors and trades at a 19.5 earnings multiple. The multiple is fairly reasonable when considering the company’s long history of growth, and the potential upside it can experience from its Disney parks and resorts segment.
Conclusion
The stock market can be extremely volatile at times. Both The Walt Disney Company (NYSE:DIS) and Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) are compelling investment vehicles as they are well-positioned and have compelling business strategies. Going forward I believe that the stocks will outperform in a cyclical economic recovery.
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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney.
The article What You Should Do in a Market Selloff originally appeared on Fool.com.
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