As we approach Labor Day and look ahead to the final four months of the year, I think it’s prudent to assess the state of the markets. By analyzing both the opportunities and risks, you can make definitive choices for your portfolio in the context of a rational game plan to achieve your goals. 2013 has been a year characterized by significant changes in stocks, bonds, and commodities which have likely made an impact on your expectations for future returns. The shifting dynamic between each of these asset classes has brought to light the need for proactive changes to navigate these murky waters.
Global Macro View
From an economic standpoint the data continues to point to positive trends. U.S. second quarter GDP was recently revised up to 2.5% from an initial reading of 1.7%, which the markets reacted favorably to. In addition, job numbers continue to remain stable and we have yet to see the full impact of rising interest rates on consumers. These are all net positives for the domestic economic picture and point to a confirmation of the Fed’s plan to taper its asset purchases sometime this year. We all know at some point the free money train was going to have to come to an end and we may get an announcement of that plan in September.
From a geopolitical context, the picture is much darker. We are facing the potential for conflict with Syria which has spooked the markets and sent energy prices higher. In addition, we are seeing continued weakness in emerging market stocks, bonds, and currencies which does not bode well for overseas investments. All of these factors have me concerned about the potential for a spillover effect into the U.S. markets if conditions continue to worsen.
Stocks: Make The Most Of This Pullback
The domestic stock market has had a fantastic run this year. The SPDR S&P 500 ETF (SPY) has risen over 21% from the beginning of the year to the August highs, and has since pulled back slightly. Currently the bellwether large-cap index is sitting just below its 50-day moving average. Logic would dictate that a correction between 5-10% is long overdue but stocks have been amazingly resilient.
believe that the current weakness in stocks will worsen if we see a lack of conviction on the buy side, combined with additional policy shift from the Fed or an escalation of international conflict. However, any additional weakness should be viewed on the context of a buying opportunity for cash on the sidelines.
In particular I have been using this pullback to add small positions in low risk equity holdings such as the iShares U.S. Minimum Volatility ETF (USMV). Another sector that has outperformed considerably is technology stocks, with the reemergence of Apple Inc (AAPL) keeping the PowerShares QQQ (QQQ) close to its year-to-date highs.
Keep in mind that any new positions should be added with small allocations that you average into by using additional weakness to your advantage. In addition, you should be mindful of the long-term trend lines and use stop losses to define your risk.
Bonds: The Most Hated Correction of All Time
Without a doubt the move in interest rates this year has been a shock to income investors that had grown accustomed to safe and steady returns in their bond funds. In addition, interest rate sensitive investment vehicles such as REITs, preferred stocks, and utilities have all been stung by higher Treasury yields.
There has generally been a very high level of animosity towards any investment with associated interest rate risk. However, that rushing tide of resentment may be starting to slow. Recently the iShares 20+ Year Treasury Bond ETF (TLT) hit a new year-to-date low and bounced higher. This was likely due to long-duration Treasuries hitting oversold levels combined with the fear of a middle-east conflict sending money pouring back into high quality bonds.