The stock market activity of the past 6 weeks has continued the recent trend of volatility and dramatic swings from positive to negative. According to the Wall Street Journal, the VIX, a measure of volatility and fear in the stock market, reached a three-month high.
In this update, we will share our thoughts about the factors that are contributing to the current market conditions, along with what we have done and what strategies we may be considering over the coming weeks.
The news this morning regarding the ongoing problems in the European area, combined with bad domestic news, contributed to a significant stock market downturn today (Wednesday). As we look at Europe, the region is quite similar to that of a year ago and one could argue that in spite of all of the efforts, little progress has been made in dealing with the sovereign debt issues. Any austerity measures have been met with strong resistance.
Lowe Wealth Advisors believes the ultimate outcome for Greece will be a default of their debt in some manner. The EU may use terms like “debt restructuring”, but in reality a restricting of debt would be a partial default. We do not expect the European debt crisis to improve anytime soon.
In the bulk of our actively managed discretionary portfolio allocations we have almost no European or foreign exposure. Earlier in 2011 this strategic decision had started to play out as expected since US economic data had been strong enough to offset the overseas turmoil. Of course, Japan and the Middle East add to the challenges.
Today, the weakening U.S. economic data are not winning the “tug-of-war” and the foreign factors are becoming more impactful domestically. While core inflation today was reported as increasing, looking ahead inflation may be contained. In fact, energy and other prices could stabilize or decline modestly over the summer based on the current data.
Elsewhere, the domestic economic information is not moving in the direction we would have hoped. The Empire State Index, which measures New York manufacturing activity, showed a significant deterioration in sentiment. The Philadelphia Fed Index will be released in the coming days. This index samples PA, NJ and DE. Lowe Wealth Advisors will be evaluating this data to determine if it is perhaps a precursor to a negative national number.
The other issues we have been concerned about include the Federal Debt Ceiling and the end of the Federal Reserve’s QE2 program. This could lead one to ask, is it time to sell your stock funds? While Lowe Wealth Advisors made some strategic shifts recently in our actively managed discretionary accounts (we shifted out of high yield bonds, floating rate bonds in favor of higher quality bonds and reduced exposure in other concentrated higher risk equity sectors such as financials) we are not yet ready to shift to a fully conservative stance (though that could change by the time you read this).
Bear in mind that our allocations are diversified across various asset classes and many include various levels of exposure to gold, merger and acquisition sectors, and dividend paying stocks.
The possibility of favorable corporate earnings in early July, which could in turn drive a possible stock market rebound, remains viable. While the potential that this could occur may be diminishing, we cannot fully discount the possibility and want to be careful that we do not miss the ability to participate in a potential rebound by making dramatic shifts today. We have a modest willingness to tolerate some potential downside in the short-term so long as we believe a potential rebound and recovery could develop.
Another scenario which could provide a potential rebound to the equity market would be if the IMF and ECB find a solution for Greece and the pull back from the edge of default.
If our view about the possibility of a rebound based on U.S. economic data and earnings diminishes, we would then begin to shift to a more defensive posture. Under this scenario we would reduce exposure to industrials, technology, materials and certain commodity sectors. In turn, we would likely increase our exposure to high quality bonds, the gold sector, certain utilities and cash. (Note: this is not a recommendation to implement any particular strategy and our recommendation may change and should not be relied upon to make an investment decision)
We will post an audio commentary to our website tomorrow (Thursday) following the release of the Philadelphia Fed Index data.
Client Service Agreements
By now most of our clients should have received an updated Client Service Agreement. Thank you to those who have returned them already and thank you to those of you are will be sending them back this week. It is very important for Lowe Wealth Advisors to receive the agreements by June 30. Should you have any questions please email or call us.
We want to note a typo on the exhibit of the Schedule of Assets. This should read assets.
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.
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. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors. 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.