Federated advises: Be wary of bitcoin
Managers with financial services firm offer largely optimistic view of U.S. economy
Individual investors who have been watching the price of bitcoin smash through record after record over the past year may find some relief knowing a roomful of institutional investors who met Friday at the Duquesne Club to talk finance are just as puzzled about the future of the digital currency.
“Bitcoin is clearly not part of the financial establishment,” said R.J. Gallo, senior vice president and head of fixed income investments at Federated Investors, Downtown. “It has a lot in common with gold in the sense that people are looking at it as a store of value or something of value that is independent of the Federal Reserve or any other central bank.”
But bitcoin, which traded just shy of $18,000 per unit Friday, has its own set of challenges. Hacking, which is all too common these days, already has occurred on bitcoin exchanges and anyone who jumps on board should be prepared for a massive rollercoaster ride, he said.
“I wouldn’t be surprised if that first wave of investors ends up losing their shirt,” Mr. Gallo said. “I don’t know when. It took awhile for the first technology bubble to burst. It took a while for railroad bonds to go sky-high, then tank. Looking at the investment fundamentals of what bitcoin is, I think suitable skepticism is probably warranted.”
Mr. Gallo and Federated’s chief equity market strategist Philip Orlando delivered their 2018 Economic Outlook to about two dozen institutional investors at an annual breakfast meeting hosted by Federated Investors to help the company’s clients better understand events that will shape the investing landscape in the coming year.
Federated, which manages $364 billion in assets, provides investment management to about 8,500 institutions and intermediaries including corporations, government entities, insurance companies, foundations, endowments, banks and broker dealers.
For the most part, Mr. Orlando and Mr. Gallo offered an optimistic view of the economy over the next four years.
Although the current bull market will soon turn 9 years old, the investment managers believe there is still money to be made in stocks. They believe the S&P 500, which currently stands around 2,700, can get to 3,000 over the course of the next year or so and continue to rise above the 3,200 level into the middle of 2019.
They believe U.S. gross domestic product, which is a measure of the total output of a country, should stay in the 3 percent growth range for the next couple of years.
They do not expect a U.S. recession until at least 2020.
Following the surprise victory for Donald Trump in the 2016 presidential election, Mr. Orlando and Mr. Gallo told investors last year that the market may have gotten ahead of itself. However, they had expected Mr. Trump’s pro-growth, lower taxes and less regulation policies to take the S&P 500, which at that time was about 2,260, to 2,500 by the end of 2018 — a target that the market already has exceeded.
While their 2017 predictions fell well below the stock market’s actual performance, investors would have still come out on the winning side had they followed last year’s guidance.
This year’s outlook is being offered at a time when stock markets are sky-high, interest rates are still very low, inflation is tame and the prospect of a corporate tax cut on the horizon could bring more fuel to the equity markets.
“The underlying fundamentals that have driven equity prices right now are doing pretty well,” Mr. Orlando said. “Then we’ve got the potential tax bill we think we may see out of Washington in the next week or two. The key to this tax bill is structural fiscal policy reform at the corporate level.
“At 39 percent statutory, we have by far the highest corporate tax rate in the world. The global corporate average is down around 24 percent. Companies were moving jobs and factories elsewhere in order to get better tax rates. The way to fix those problems and to keep those jobs here is to fix the tax bill and that’s exactly what we think is going to happen.”
Mr. Orlando said Federated is hoping to see is a tax rate that will come down to the 20 percent to 25 percent neighborhood.
With unemployment being lower than it’s been in decades and inflation under control, Mr. Gallo expects the Fed to continue raising interest rates.
“I think we will see yields rising everywhere,” he said. “So, the 10-year Treasury which is around 2.36 percent at this present time will probably be somewhere around 2.6 percent or 2.8 percent as the year progresses.”