It’s all about the Fed!
So, here we are, already half way through the year. What have we got to show for it, in terms of the market? Not a whole lot, to be sure.
According to my math, as of the 13th, the Dow is effectively unchanged since year-end. The S&P500 is up about 2%. The NASDAQ, benefiting from its tech and biotech components, is higher by about 6%.
The Wall Street Journal’s market data crew has found that this long-term running in place by investors is, in a word, unusual. For instance, even after last Wednesday’s stock rebound, all that happened was to move the Dow back to the middle of the sideways trading range it’s been over the past four months.
According to the WSJ folk, last Wednesday was the 16th session of 2015 in which the closing level of the Dow Jones Industrial Average went from being higher for the year to lower the next day – or vice versa. To top it off, they said there’ve never been so many crosses of the base line to start year in the index’s 119-year history.
Investors lack conviction
According to a report on Thursday from the American Association of Individual Investors (AAII), which uses polling data to generate a sense of investor sentiment over time, bullish sentiment has fallen to 20 percent. That’s the lowest it’s been since April 2013. Meanwhile, bearish sentiment has risen to 33 percent, and neutral sentiment remains at historically elevated levels.
The AAII wrote, “Bullish sentiment readings below 28.6 percent are unusually low and unusually low levels of optimism have typically been followed by better-than-average six- and 12-month returns for the S&P 500.”
The thinking is that this lack of positive conviction is a bullish sign for stocks, i.e., investors don’t see too many bullish signs for stocks. The basic idea behind the use of sentiment as an indicator is that bullish investors have already bought in and neutral or bearish investors are underallocated to equities. As the latter come around, those skeptical investors will then jump into stocks, eventually driving the market higher. (For the converse reason, excessively bullish sentiment is generally taken to be a bearish indicator.)
Perceived risk
According to Howard Marks, for investors, risk could be defined as: “The permanent loss of capital, volatility, not knowing what you’re doing, uncertainty, what’s left over after you’ve thought of everything, black swan events, drawdowns, running out of money before you die, missing out on huge gains, taking part in huge losses, not hitting certain performance targets, the price you pay for an asset, making a huge mistake at the wrong time and complacency.”
But wait – there’s more. We also have systematic (undiversifiable) risk in the markets and unsystematic risk (diversifiable) in stocks. In bonds, we have credit risk, duration risk, inflation risk and interest rate risk. You also have to worry recessions, geopolitical events and bad luck.
I always say that the biggest risk is not reaching your goals, but, in reality, that’s just one risk to consider, and, since most people’s goals seem to be moving targets, it’s an incomplete definition.
One of the best ways to manage your risk is to have a comprehensive strategy in place. Having a strategy you rely on – and stay with – doesn’t mean you can eliminate risk altogether…that’s impossible. Taking some measurable risk makes sense. You just don’t want to get into the habit or taking unnecessary or unacceptable risks. So now, all you have to do is figure out what those unacceptable risks are for you.
At Opus, our goal in constructing client portfolios is for our clients to take just enough risk needed to get them to where you want to be, when they want to be there…and no more.
The Fed meets
As we go into the Fed’s meeting this week, we have good consumer confidence, corporate balance sheets that’re in good shape and payrolls that’re strong. We’ve set the stage for a solid economic recovery as the improving global economic data should go hand-in-hand with the selling in Treasurys and increases in yields we’ve been seeing.
My guess is no rate rise this time.Further, I feel that future rate increases will be measured and incremental…think “less loose”. As Bob Doll observes, “The Fed has made it clear that it does not want to derail the economic expansion and will move very slowly if and when it does shift its stance.”
Understand that it’s not rate hikes that cause bear markets – regardless of the age of the bull – it’s when the Fed goes too far that a recession comes on, which then sets the stage for a stock market plunge.
I do believe that we’ll see some market gyrations when the rates do change. Regardless, my advice for all investors with long-term horizons is to look past any near-term volatility. Economic growth definitely appears to be improving, driven by a healthier consumer sector.
Bottom line – I believe that the stock market still is attractive with more upside opportunity for patient investors in high-quality holdings.
Best wishes for a most wonderful Father’s Day from all of us at Opus!
Cheers!
Mike
Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
To get an overview of economic conditions, use this link. It’s updated monthly. http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns.
Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.
Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
