Time for Asset Allocation Changes?

Bond investors should not anticipate the beginning of a bond bear, however. The economy’s weak data do not support tightening and Federal Open Market Committee (FOMC) members like Chicago’s Charles Evans know it. That is why he is now suggesting that rate hikes can wait until 2016. In fact, it might not be long before other voting members express a similar sentiment. Job growth is slowing, oil prices are rising and earnings growth is flatlining.

It gets worse. Remember, nearly every economist on the planet expressed that lower oil prices would amplify consumer spending. Yet U.S. import data suggest that consumers have less punch than a boxer with one arm tied behind his back. Manufacturers? The Institute for Supply Management’s (ISM) index of factory activity only registered 51.5 in April, which served as the lowest reading since 2013. In other words, there may not be a “winter thaw.”

The biggest problem that the Fed faces now is whether or not it will be willing to push ahead on a monetary tightening course at any point in 2015. Conventional wisdom suggests that committee members are capable of saying and doing all of the right things to keep stock and bond investors from losing the faith. Unconventional wisdom? Perhaps the Fed reads the tea leaves wrong or perhaps they will be willing to let stocks slump and/or yields soar. Both would be rather traumatic for “diversified” asset allocators.

Lengthy periods without corrections are statistically uncommon, particularly when an economy is struggling and the Fed is tightening. Having some extras cash on the sidelines is prudent. Today, I’d be a buyer of 10-year treasury proxies like IEF as well as longer duration munis in taxable accounts like Blackrock Muni Assets Fund (MUA). And if you are light on the international exposure, you might look for a bit less volatility from iShares MSCI EAFE Minimum Volatility (EFAV). The European Central Bank’s (ECB) commitment to quantitative easing is ultra-accommodating in the world of rate lowering manipulation.

EFAV 9 Months