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Don't expect fireworks in your investment portfolio between now and the end of the year. Slower growth in the economy and profits, plus the move higher in interest rates, leaves limited scope for eye-popping returns. Stocks are still the best bet over the long term, but their upside potential in the near term is fading after a gain of about 5% so far this year and a robust rally over the past 12 months. Look for the increase in Standard & Poor's 500 stocks to average 2%-3% by year end, with the average return to shareholders working out to 9% or 10%, including a 2% dividend yield, for the entire year.
Eroding confidence will soon guide investors toward a more cautious approach. The list of jitters-inducing issues includes rising gasoline prices, the cooler housing market, growing tensions between the U.S. and Iran and uncertainties about this fall's midterm congressional elections. On a more fundamental level, growth in corporate profits is poised to decelerate after double-digit gains in the first quarter. S&P companies will average 8% better profits this year, compared with 13% last year. Blame higher tabs for energy, skilled labor and other expenses, which will trim firms' profit margins as slower economic growth leaves little room for passing along cost hikes to consumers.
Large-company growth stocks are the best bet in these uncertain times. Healthy earnings at General Electric, 3M and similar firms still haven't shown up in their relatively cheap stock prices. To capture the sector's gains in a mutual fund, check out T. Rowe Price Growth Stock and Marsico Growth. And there are opportunities abroad, with the economies of Japan and Europe revving up. Dodge & Cox International fund offers broad global stock coverage. We advise earmarking about a quarter of your stock profile for non-U.S. equities.
Bond prices will fall as long-term interest rates head higher. The benchmark 10-year Treasury bond will yield 5.25% at year end, up from 5% now. On the corporate bond side, investors need to be alert for downgrades by credit-rating agencies as slower economic growth reduces some firms' creditworthiness. The risks of downgrades are highest in the telecom, automotive and consumer products sectors.
Some investors have been fortunate enough to cash in on the huge run-up in prices of gold and other metals in recent years. But these rallies are likely to lose momentum in coming months after metals prices have hit successive records. And no matter how well commodities perform over a given period, investors should be aware of their high volatility—huge price swings happen very quickly. If you want to dip into metals now, investing in funds such as Pimco CommodityRealReturn Strategy and Credit Suisse Commodity Return Strategy is a slightly safer route than buying futures or options in a given metal. The funds spread the investment risk among various commodities.
As housing cools, property investors should think commercial. Real estate investment trusts (REITs) focusing on offices, hotels and other commercial space will outperform those specializing in residential properties. Although all types of REITs have posted big jumps in recent years, don't expect the same this year. A couple of the more promising funds in the commercial category are Vornado Realty Trust (in offices and retail) and Hospitality Properties Trust (in hotels).
Cash is a lucrative safe haven right now, with some one-year CD rates topping 5%. For example, GMAC Bank, based in Greenville, Del., is offering a 5.25% annual percentage rate return on accounts requiring a minimum investment of only $500. First Internet Bank of Indiana, based in Indianapolis, offers 5.22% with a $1000 minimum.
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