Extreme Selectivity in Equity Portfolios Remain the Priority

By Rob Isbitts via Iris.xyz

Investment markets can be confusing. To try to cut through the chatter and investment slang, we present this monthly view to you. We want to give you a 50,000-foot view of market conditions updated as our view evolves. Currently, our Investment Climate Indicator remains at “Stormy”. Stormy means that bear market rules apply, and we believe could be a period of wealth destruction.

This year, March has come in more like a lamb and less like a lion. As the chart below shows, the CBOE S&P 500 Volatility Index, an oft-quoted measure of anticipated stock market worry, returned to its pre-October area.

The past 5 months have seen a range of investor emotions. But, as has been the case for 10 years now, calm was quickly restored. We are still clearly in “Stormy” weather from an intermediate-term perspective, but as I have written here in the past, that doesn’t mean we can’t have some “rips” to the upside among the wealth-impeding “dips” like we saw on two occasions last year. The key point to understand right now is that while returns can be had, pursuing them involves a historically-high degree of risk.

The VIX, a market perception of fear, does not tell you that. But the VIX is not a predictive tool as much as it is a snapshot of how fearful investors are right now. So, yes, I am telling you that risk of major loss is still high. History and a wealth of indicators about the global economy are pointing in that direction.

High-frequency trading, massive amounts of assets invested similarly, and interest rates that are too low to provide a decent cushion for central banks adds up to a period where caution is king. We continue to be defensive, at the edge of the “Extreme Zone” in our portfolio positioning. Higher than normal short-term cash & equivalent investments and extreme selectivity in equity portfolios remain the priority.

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