Insight & Commentaries
Recent crisis in Europe puts the European Union to the test. This commentary explores the issues of union in the context of the crisis. Also, we notice the U.S. economy continues to fair reasonably well. Portfolio posture remains cautious as we await a measurable sign of improvement in fundamental conditions.
Despite the confidence shock from August and September’s market drama, the U.S. economy performed reasonably well, judging by recent data. Risk has been pared back beginning last spring, and model portfolios are tilted more toward bonds within strategic ranges. We are watching for signs of stabilization in fundamental conditions before returning portfolios to a more fully invested “neutral” posture with greater equity exposure.
Healthcare and Consumer Staples offer investors opportunities. A conversation with portfolio manager and market strategist, Kevin Caron.
The choice now facing policymakers is between gradual or bold action in light of the weaker economy and more fragile markets. Restoring faith in Europe’s financial system and avoiding deflation must be job number one.
While a recession would mean lower stock prices, a longer view reminds us that tough times also create opportunity. Stock holdings should be viewed as part of an overall mix of personal assets. A balanced approach allows for smart risk-taking.
Major U.S. stock market averages have corrected by greater than 10% from highs reached in May. Intensifying concern about potential default by some European countries, an unsettling debate over the funding of the U.S. deficit, and generally disappointing economic data has provided little reason for investors to bid up stock prices. This weeks commentary discusses the week that was and discuss how investors should respond to recent volatility.
Beginning in May, portfolios were allocated closer to the middle of prescribed ranges for stock and bond exposure as data showed signs of slowing. Bond allocations were modestly raised, defensive sectors were added, and domestic large-cap value was re-introduced into portfolios. Greek and European debt issues have been the focus of investor attention in recent weeks. Although we have no direct equity exposure to Greece, Ireland, Spain, or Portugal, we discuss the potential for Europe to find a “fix” to a difficult set of issues.
The pace of economic recovery has slowed based on our analysis of incoming data. The WCA Fundamental Conditions Index™, which evaluates changes in thirty different measures of financial and economic conditions, has slipped to a current reading near 65 from above 80 earlier this year (chart below). So long as this downward trend persists, a tactical portfolio posture with a somewhat broader diversification and closer to a neutral “risk / return” posture is appropriate. The shift was accomplished primarily through a modest increase in bond allocations beginning in May.
Since the Federal Reserve began its large-scale asset purchase program last fall, there has been a widespread and sustained improvement in most of the indicators we monitor. It is difficult to say exactly how much the program contributed to the improvement, but there is at least a coincident relationship between the Fed’s purchase of assets and the overall movement of much of the data in recent months. Importantly, aggregate profits have continued to increase, which is a positive indicator for future investment.
There are two questions that must be asked when making the tactical choice between stocks and bonds. This commentary focuses on what those questions are, how we attempt to answer them, and what it means for allocating assets between stocks and bonds. We also introduce the WCA Fear-Greed Index and discuss its use in tactical asset allocation.
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