Founder & Chairman
Given recent developments in the markets overall, we have decided to make some adjustments to the model portfolios. A recent increase in volatility, coupled with consistently weaker economic data and shifting trend data in the algorithm all suggest reducing some portfolio risk may be advised. Weather apologists would have us believe that the recent weakness in economic data was driven by a rather cranky mother nature. While weather can most certainly play a role, we doubt that it was the only factor driving a slower economy. Tensions in Russia, an almost currency crisis in Latin America probably played a role as well. The Federal Reserve’s initiation of the tapering process may have played the largest role, but the truth is nobody really knows for sure. What we do know, is that domestic equities have been on a 5 year run, without much of a pullback, and while these types of moves can last longer than anyone thinks, a prudent investor might consider being a little cautious.
As for opportunities, we believe that there are a couple of asset classes that might attract inflows should the U.S. equity markets continue to fade. While the Federal Reserve has begun a reduction in bond purchases, interest rates have held pretty steady as of late. It’s likely the Fed won’t even think about raising rates until 2015, and if the economic data continues to remain slow, we believe rates may hold steady or even decline to some degree, even if for just a few months. Such a change presents an opportunity for long-bonds, particularly if we see a flight to quality out of equities. As U.S. equities lose steam, assuming that trend continues, it could just be a rotational situation. It’s possible that investors have sized up the domestic equity markets, and have decided that places like India look more attractive from a valuation point of view. The domestic markets don’t necessarily have to correct or even decline in order for investors simply to look for better opportunities. Small caps seem to be rolling over, making larger companies look more attractive at this point, considering a lower risk profile and possible international revenue streams.
We always invest with an eye on overall risk. While there haven’t been any monumental shifts, signs are pointing to a general rotation away from riskier domestic equity positions. We’re not moving away from equities, but rather looking to reduce certain risks, and try to take advantage of possible opportunities that may benefit from the asset rotation we mentioned earlier. As always, if you’ve given us authorization to make automatic changes, we’ve already updated your investments. If you have not given us discretion, then you will have to contact us to make the changes we are recommending. Rest assured, we are monitoring the situation very closely, and we have the tools and strategies to assist us in this process. We appreciate your continued trust and confidence, and we believe the upcoming environment will give us an opportunity to display exactly why you’ve hired us.
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