? U.S. growth stocks had more room to move higher, now they are grossly overvalued.
? Rising interest rates was the greater risk, now they have fallen all the way back.
? International equity returns were trouncing the U.S., now foreign stock markets are to be avoided.
? The U.S. was in the midst of an energy renaissance, now oil rigs are shutting down.
…and each of these reversals of fortunes and sentiment, misplaced in certain cases, has occurred in the last four to six months!
As a result, diversified portfolios are now slightly above or below flat line for the year. This seems fitting given the fact that the U.S. stock market has been above or below flat line more times this year than in any year since 1994. A variety of asset classes have taken a turn leading the performance charts, only to have their underlying investment theses called into question.
The reason for this apparent market schizophrenia is quite simple, and not particularly worrisome; the market was priced for a global expansion, and instead hit a soft patch- both in terms of GDP and corporate profit growth. Now we are experiencing an uncomfortable but necessary repricing.
In the face of this renewed volatility, few of our portfolio strategies have changed. In fact the outlook for several portfolio components has improved recently:
U.S. growth stocks are “overextended”, but the asset class is the engine for portfolio growth and will be better priced as the market corrects.
Defensive “income-equity” sectors, primarily Utilities and Real Estate Investment Trusts (each almost exclusively domestic), dropped in price earlier in the year while interest rates moved higher. Both have rebounded very nicely during this correction, as these sectors are considered a relative safe haven.
The first half performance gain in large cap European stocks has waned somewhat, but we still believe in the improved growth opportunities and lower valuations in European equities. The lower Euro will help see to that.
China’s stock market (and emerging markets in general) has stumbled, but the broader Asian growth story remains intact – the Chinese government and private investors are working out the kinks.
The energy sector has been hit hard and may fall further. However, if you stick to the quality income-producing portion of the energy sector you should be fine, as dividend re-investment will help these positions heal themselves.
Bond prices have improved recently, with interest rates backing down, but the 3-5 year outlook for bond market returns and income yields still look very thin and we do not see much opportunity, other than providing a safe harbor during a stock market correction.
The fundamentals in most of the economies in which we invest are improving, just not necessarily as fast as we would like. It was interesting to see that the most recent U.S. durable goods orders came in stronger than expected –particularly in the all-important business spending category. Yet, even in the face of positive economic reports, the market’s direction is lower – perhaps ultimately more than deserved. A six-year bull market needs a break. Accordingly, we intend to handle the current market swoon by investing portfolio reserves, and in some cases reallocating bond exposure, into high quality equities that have come down in price. This is how you establish future returns.
These are the opinions of Riverside Financial Group, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
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