The rise in domestic equity markets year-to-date has been essentially unabated and without a significant correction. In times of market strength investors’ level of complacency often increases and optimism can become excessive. As complacency and optimism build, so does the potential for volatility.
The news from the home building continues to be favorable. Tuesday, the Associated Press reported that a 10.9 percent rise in U.S. home prices in March compared to a year ago was the largest increase in almost seven years. The auto industry has also provided growth throughout 2013.
As we look toward the summer, Washington is occupied with numerous issues and paying little attention to sequestration, the debt ceiling and other budget issues. Equity markets have overall continued to rise and show resiliency year-to-date. However, the markets have also shown their sensitivity to any hint of a change in Fed policy or unexpected news from overseas.
A change in Fed policy continues to be the most significant risk to both the bond and equity markets in the near to mid-term. All indications are that Federal Reserve Chairman Bernanke would reduce the stimulus in a measured manner, but only time will tell.
Investors will likely be watching the process for a potential new Federal Reserve Chairman. The names of Janet Yellen and Larry Summer surfaced as potential leading candidates. Lowe Wealth Advisors will closely monitor these developments for clues as to what impact the selection may have on the Fed policy and stimulus programs.
Tuesday’s increase in consumer sentiment is among the best reading since the recession according to Morris Segall of Sage Policy Group. The rising stock market, rising home prices, reasonable job creation and the absence of bad news out of Washington could boost consumer spending for autos, homes and related services.
A recent rebalance in many of our actively managed allocations are consistent with these views. While diversification remains important, our focus will remain on large-cap domestic companies, the home building sector and dividend-paying equities.
Looking at similar periods in history – with the economy entering its fourth year of expansion – high quality stocks have historically tended to outperform (according to Ned Davis Research).
As strong as equity markets have been in 2013, bonds have in many cases have turned in negative performance. We plan to maintain our exposure to bonds but will adapt and adjust our exposure as warranted. We may expand upon our recent decision to decrease the maturity length and duration of bonds. Bonds are poised to turn in their worst performance for a month in many years according to Bloomberg. One only has to look at the performance of bonds on May 28th to be reminded of the potential risks associated with bonds and the impact any potential shift in Fed policy could have.
For now, our short-term view remains optimistic for domestic equities while recognizing the potential for volatility.
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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.