2013: The Year So far Warren Buffet once said, “Only when the tide goes out do you discover who’s swimming naked.” In the first half of 2013, the markets hit a number of all-time highs, then reacted negatively when the Federal Reserve announced its intentions to scale back efforts to keep interest rates low if the economy continued to strengthen. Both stocks and bonds fell on Ben Bernanke’s announcement, with commodities and emerging markets enduring double-digit losses, as investors realized that the low rates and the easy money party may end soon. Even so, some parts of the markets soon stabilized, thanks in part to sound corporate earnings, still-low inflation, improved consumer confidence supported by better unemployment numbers, and reasonably consistent good news about our economy. For the first half of 2013, the Domestic Equity Markets did well. The Non-U.S. counterparts did not fare so well, with Developed International Markets underperforming U.S. Markets and Emerging Markets declining even more, ending in negative territory. The Bond Market was brutal for investors, especially in the last two months during which the 10 Year Treasury yields rose 1% between May 2 and June 25. Bonds showed losses in the first half of the year. Commodities suffered double-digit losses. Sources: Morningstar Direct and Bloomberg. 2013: The Year Remaining… With the Fed stimulus set to end, risk taking looks less attractive. In the past few years, many markets have performed like a synchronized swimming team, moving up and down together. These atypical correlations appear to be breaking down, requiring investors to focus once again on the fundamentals of each asset class. We are keeping a watchful eye on key economic and market indicators. Expected U.S. GDP growth for 2013 has been revised down to 1.8% annualized from 2.4%, partially based on a slowdown in exports, low capital spending by businesses, and the pending change in the Federal Reserve’s easing policy. Globally, China, Japan and Europe merit close attention, as any sudden changes in these markets could signal something graver down the road. However, we see strong positive evidence that we hope will offset these drags and keep the economy growing. The combination of a strengthening housing market, low inflation, America’s energy renaissance, continuing manufacturing boom, improving unemployment, technology improvements and less fiscal drag from state and local governments should push growth higher, in our view. The continuing strength of Corporate America earnings, business spending and hiring are also important factors to watch. In our opinion, the remainder of 2013 could be another volatile and attractive year, as many years have been of late. For now, we remain cautiously optimistic in general with a close eye on the volatile bond market. Asset Class Implications While we closely monitor short-term events, we strive not to make investment decisions based on attention-grabbing news, but on data. We focus on implementing our clearly defined and disciplined investment process to help avoid making emotionally charged decisions. GV’s transparent process requires our Investment Committee to analyze a variety of economic and market data so we can identify which asset classes might be overvalued or undervalued and make appropriate adjustments to our model portfolios. Some of the conclusions we have drawn from the analysis that underlies our recent tactical adjustments appear below (see Important Disclosures). PLEASE NOTE: GV Financial Advisors’ CEO and Senior Portfolio Manager will discuss some of the data underlying our mid-year tactical changes in more detail during our live, one-hour webinar on Thursday, July 25 at 11:30 AM EDT. For those unable to attend the live webinar, please indicate your interest by registering for the webinar and we will send you a link to the recording. Register for webinar. Bonds We accept that the bond bull market of the last 30 years is over, and the bond bear market has begun. Investors, even those who already have made numerous tactical changes within their bond allocations, must continue to be proactive in crafting creative adaptations in the face of today’s serious bond conundrum. Bonds could settle down for a while, but we anticipate higher yields over the next few years as the economy strengthens. Convertible Bonds could offer additional opportunities to investors. Simply explained, convertible bonds are corporate bonds that may be converted into common stock of the issuer. These hybrid bonds combine the income and stability of a bond with the appreciation potential of a stock. Convertible Bonds tend to work better than traditional bonds in a rising rate environment because rates generally rise when the economy and markets are rising. Convertible Bonds, with their embedded equity exposure and shorter durations, could benefit from the rising equity prices. At the same time, because they are bonds, Convertible Bonds also could offer some downside protection against falling equity prices. Bonds remain a vital part of most portfolios. For many investors, bonds perform vital functions. Bonds often help reduce portfolio volatility; they provide ongoing income; and bonds may provide some retired investors the cushion they need to hold onto their falling equities in a down market. Over time, potential bond losses may be reduced as bonds mature and the proceeds are reinvested in higher yielding credits or the interest from the current bonds are reinvested at higher yields. Active bond management can offer investors needed flexibility in today’s dynamic and challenging bond markets. We believe bond managers, especially those who have the flexibility to reposition assets across all bond sectors, offer investors the better opportunity for safely navigating today’s complicated and rapidly changing bond markets. Equities Both Domestic and International stocks could continue to offer investors value. However, our recent valuations analysis reveals that International stocks remain historically and relatively cheaper than U.S. stocks. Our data suggest that Large-Cap and Growth companies continue to be relatively cheaper than their respective Small-Cap and Value counterparts. Although relative margins have narrowed when compared to last year, there may be opportunity for investors in both Large-Cap and Growth stocks. Alternatives Investors might want to consider Alternative investments that seek to maintain a negative correlation to the equity markets. Commodities could prove tricky as global growth has slowed. On one hand, the ongoing sell-off in this asset class might continue given investors largely negative sentiment. On the other hand, the ongoing demand for scarce resources and their oversold status may warrant maintaining Commodities as a diversifier in portfolios. Real Estate fundamentals seem to be improving across all property sectors, but our enthusiasm is tempered by the fact that from a valuation standpoint REITs appear relatively expensive. Final Words It is easy to interpret big market moves as a sign that something important is occurring, when many times it’s just “market noise” as we have seen over the past several weeks. Acting in haste in response to such noise is rarely a winning long-term strategy. The coming post-QE era will reveal much about the health of both the markets and economy and who went swimming with their trunks on. Ultimately, investors must accept that while no strategy can insulate any portfolio from every global event and market fluctuation, carefully considered tactical moves could help investors position their portfolios to thrive in the current economic climate and changing market conditions. Mahanubhav Financial Services
Posted on: Mon, 22 Jul 2013 17:05:18 +0000
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