The past two trading days have seen the Dow Jones Industrial Average (see index disclaimer) drop into negative territory for 2010 (Source: Wall Street Journal).
During the later half of 2009, we often wrote about possible weakness and potential volatility in 2010. At this time we do not believe any fundamental economic factors have changed. In fact at the time of this writing as we enter the corporate earnings season we believe most companies will have positive earnings. The exception would be retail businesses which are heavily dependent upon consumer spending.
If this holds true, potential gains for the stock markets could continue but possibly with more frequent volatility.
There are several noteworthy factors that may have caused the stock market to drop this week. They are:
- Investors are nearing the recovery point on some of their holdings and decided to take profits off the table.
- China taking steps to slow growth.
- The change in the political landscape based on the MA election.
- President Obama’s proposal to reinstate strict regulations on banks.
In reality, it may be that investors simply used President Obama’s proposal as an excuse to take profits. We will be watching closely to see if other investors who have been sitting on the sidelines with cash, return to the stock market. This scenario could provide a potential stabilizing force as it often did in 2009.
Do we anticipate any action as a result of the recent market activity? Lowe fs tries to avoid getting hung up on daily and weekly numbers. Rather, at this time we believe focusing on longer term trends is prudent. The direction of the market, at least in the first half of 2010 in our opinion is largely dependent upon corporate earnings, job creation and interest rates.
We anticipate using days of market fluctuation as opportunities to rebalance our actively managed portfolios (not all portfolios are actively managed). Where there are excess cash holdings Lowe fs will purchase holdings on potential down days where appropriate.
We remain in regular contact with our capital markets analyst and if necessary we will take appropriate action in our actively managed portfolios, should the market situation deteriorate.
There is one final thought that is important to reiterate regarding many of our actively managed portfolios. Most allocations remain overweight in cash and underfunded in bonds. The reason is that we believe interest rates are likely to rise. Historically, rising interest rates are bad for bonds.
Our view remains unchanged at this time. The overfunding in cash is a temporary strategy. As soon as we believe it is appropriate to move into bonds in our actively managed accounts we will do so. The cash is not exciting, nor does it pay a significant yield. However, in our opinion the risk is generally less than that of many types of bonds.
On a personal note, Harold is grateful for the many well wishes and prayers from all of you. He has successfully completed two rounds of his chemotherapy. He has been able to come into the office several days a week this month. I am sure most of you never thought the day would come when you would see Harold without hair. Well, that day has come, but we think he looks great. His attitude is great, he truly looks good and we all remain very optimistic. We will keep you informed of his progress and I know he looks forward to talking with and seeing all of you very soon.
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 fs is a registered investment advisor.