Lowe Wealth Advisors Second Quarter, 2011 Outlook and Strategy Update
As we close the first month of the second quarter, investor focus seems to have shifted away from the Middle East turmoil, the tragic events in Japan and the continued sovereign debt issues of Europe and on to the U.S. Debt Ceiling.
At the same time, U.S. economic data has continued to be favorable in the form of generally strong corporate earnings. Tim Hayes, of Ned Davis Research Inc., noted that as of last week, 67% of the earnings released had been surprises to the upside (better than anticipated).
The Lowe Wealth Advisors view for the second quarter of 2011 continues to be one favoring domestic equities. We believe that the equity markets have the potential to move higher, but will likely see corrections along the way. We expect to see the continuation of the “Risk On” and “Risk Off” mentality of investors with the “Risk On” being the predominant theme.
Our actively managed discretionary equity allocations continue to emphasize domestic holdings. We have reduced or eliminated our foreign equity exposure due to the elevated levels of risk and volatility and remain bearish in the near-term on the sector for the following reasons:
- Developed market (U.S.) stock valuations still appear to be better bargains. Quite simply we believe there will be more appropriate price points for entry into the foreign and emerging market sectors later in 2011.
- Emerging market inflation may have begun to stabilize, but it has stabilized at a very high level.
- There has been a speculative surge of money moving to certain emerging markets. This “hot money” in our view is propping up the emerging market sectors and the downside risk could be increasing.
- Issues in the Middle East, Europe and Japan are far from resolved.
In certain allocations we have begun to build a position in the Chinese yaun (the base unit of currency) as a way of obtaining initial exposure in China. The yaun is also a potential hedge against the dollar should it continue to weaken. It is also worth noting that even though our focus is on domestic equities, investors can obtain international exposure by investing in large-cap domestic companies that conduct global business. Coca-Cola is a great example of a domestic company that has a global presence.
When the prices are appropriate we will begin to build emerging market positions in certain allocations. The most likely scenario is that we would target specific countries such as China, India and Brazil rather than utilizing a broader emerging market holding.
Our view of bonds remains one in which we are avoiding U. S. Treasuries and concentrating on short-term maturity bonds with varied credit qualities. We have focused on bonds with higher yields and shorter maturities because they can be less sensitive to interest rate changes as compared to longer-term bonds. However, changes in strategy may be necessary depending upon the direction of the Fed and the overall economy.
Our focus on U.S. equities should not be mistaken for a favorable long-term domestic outlook. The fact is we have been saying for over a year that the U.S. has some serious long-term challenges. When Europe began to face their sovereign debt issues, we noted that our boat was taking on water as well. We stated that “our boat was bigger and would take longer to sink,” hoping this would provide the opportunity for corrective measures to be taken.
Indeed, the U.S. is taking on water, but still has time to take corrective actions. It is clear that relying on future growth of the economy to deal with our onerous debt burden is no longer a viable strategy. We expect a great deal of rhetoric and posturing by both parties as the Debt Ceiling and budget issues will escalate in the coming weeks and months.
Depending upon the action or inaction of Congress, we may be forced to scale back the level of risk in our allocations between now and June. We hope this is not the case, but we will be carefully monitoring the situation.
In our view the most realistic outcome will be a modification of the Debt Ceiling and that budget cuts will be part of the package.
Inflation and the devaluation of the dollar remain significant risks for U.S. in the longer term and we will adjust our actively managed portfolios accordingly when appropriate. Historically, relying on commodities, foreign currencies and foreign stocks can be a good response in this type of environment.
We want to emphasize a point about precious metals, and in particular silver. While we stated that precious metals can be a hedge against a falling dollar and inflation, we believe silver has especially attracted significant speculative money and as such, may be at risk for a possible correction. Our view of gold calls for possible short-term volatility and longer-term potential growth. It is very important to remember that metals and all commodities tend to be very volatile and can experience significant price swings.
If consumer spending continues to improve, earnings continue to remain strong and unemployment decreases, we believe the stock market can continue to creep higher in 2011. If any of the aforementioned factors weaken or if the Debt Ceiling issue becomes protracted then a re-evaluation of our allocations would be necessary.
Please note: Harold Lowe has a new email address. It is HLowe@lowewealth.com. All other Lowe Wealth Advisors email addresses remain unchanged. Please update your address books to ensure future delivery of emails to Harold.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Not all portfolios are actively managed. If you have a question about how your account is being managed please contact us. Generally accounts less than $150,000 are not actively managed. An Index is a portfolio of specific securities (common examples are S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.
- Not all portfolios are actively managed. If you have a question about how your account is being managed please contact us.
- No diversification can completely protect against market risk or other risk factors with investing. A diversified portfolio could still lose money.
- An Index is a portfolio of specific securities (common examples are S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.
Foreign investing carries additional risk such as currency risk, political risk and different accounting standards.
*Lowe Wealth Advisors is a registered investment advisor.