With a great deal of volatility in the market and federal sequestration budget cuts looming, Lowe Wealth Advisors is encouraging investors to be cautious and diligent.
On the heels of its first weekly decline of 2013, the S&P 500 dropped 1.8% on Monday. Gold and other precious metals rose while the VIX (a gauge of U.S. stock options used measure market volatility) rose the most since 2011. (Bloomberg) On Tuesday, investors responded positively to improved consumer confidence numbers as well as Fed Chairman Bernanke’s testimony before the Senate Banking Committee.
What was the catalyst of the resurgence of volatility? As we mentioned in previous commentaries, we were concerned about the low levels of the VIX, and felt investors were so complacent that virtually any event could trigger a market downturn and increase volatility.
Then, several events took place while equity markets were laboring over the past few weeks for direction:
The Federal Reserve spooked investors last week with comments that were viewed as a foreshadowing of potential strategy shifts.
On Monday morning, news that the elections in Italy were not decisive and that their austerity programs could be disrupted sent the markets heading down.
On Tuesday, Chairman Bernanke seemed to back away from the Federal Open Market Committee remarks by repeating prior statements that the asset purchases will continue until the labor market shows “substantial improvement.” (Bloomberg)
In addition to this activity, in our view the markets have not yet considered the potential impact of the imminent sequestration.
The totality of the environment led Lowe Wealth Advisors to proactively implement a strategy in several of our more conservative allocations Tuesday with the goal of protecting some of the year-to-date gains. In many of our Conservative, Balanced and Moderate Growth accounts we took the step of realizing gains prior to the major market movement on Tuesday. Given that our Growth investors have a longer time horizon and are better able to tolerate intermediate volatility, we did not yet take action in these more aggressive allocations, but we will continue to monitor the situation going forward.
For now, the gains we have realized are likely to remain on the sidelines and in cash as we await the outcome of the sequestration process. Our action does not mean that our view on the markets has turned negative. Rather, we believe it was reasonable after a strong performance in January to take some profits off the table in an environment that is becoming more uncertain.
That brings us back to the topic of the sequester: What is it? How did we get here? What does it all really mean?
In 2011 Congress passed the Budget Control Act which created the “Super Committee” (remember them?). The Super Committee was charged with trimming the deficit by 1.2 trillion dollars and if they did not succeed (which they didn’t) automatic spending cuts would be applied across the board in January 2013. (J.P Morgan)
Congress agreed to last minute tax deals to avoid the deadline known as the Fiscal. However, they did not avoid sequestration, and they agreed to move the effective date to March 1, 2013. Now March is upon us and while many never dreamed that the sequester would actually be implemented, all indications are that we are heading in that direction.
The 2013 cuts from the sequester will focus on defense and non-defense spending. While the full impact of these cuts may not be felt until 2014, many believe that the cuts will begin to create a significant drag on our already fragile economy and could put us at the brink of another recession.
The sequester runs the risk of slowing the economy to dangerously low levels, creating potentially negative pressure in financial markets. It is also likely to cause frustration among the public as they face reductions in services to which they have become accustomed.
The CBO has estimated that while the sequester will bring down the deficit in the next few years, by 2016 the deficit will begin growing again because entitlement spending was not cut. Congress should take the time to craft a bi-partisan and meaningful solution before the impact of the sequester is fully felt rather than allowing a plan to take effect that will weaken our economy and does not seem to provide a long-term solution to the challenges we face.
Lowe Wealth Advisors is an SEC registered investment adviser with its principal place of business in the State of Maryland. Lowe Wealth Advisors and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which Lowe Wealth Advisors maintain clients. Lowe Wealth Advisors may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of Lowe Wealth Advisors, please contact Lowe Wealth Advisors, or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
This commentary is intended for the dissemination of general information regarding market conditions to Lowe Wealth Advisors clients. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this report will come to pass. While any general market information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Any opinions expressed are current only as of the time made and are subject to change without notice.
- 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.