Goodbye Bear…and Hello Bull!
A New Bull Market in Stocks
As you may recall stocks reached an all time high in early 2015, which was nearly two years ago! Due to a recession in global corporate profits, stock prices failed to reach those levels again until just a few months ago. It was a long, frustrating 18 months – as the chart above expresses, at one point stocks had fallen nearly 20%. As you know, we became quite defensive throughout this period to protect your capital from the volatility and the possibility of catastrophic loss, i.e. 2008. During the periods of significant market decline, your portfolio held up exceedingly well – had stock markets declined more significantly, your assets would have continued to have been protected. However, we now believe that a new bull market is upon us and we have accordingly moved away from this defensive posture to prepare for a great 2017.
Defensive Strategy No Longer Necessary
Our defensive posture since 2015 is no longer necessary and we are in full growth mode to take advantage of the new bull market. So far your new, more growth oriented stocks are acting great! There is a short term cost to being an active risk manager, which for a very short period, we experienced in the summer. When markets abruptly turn upward, as they did in June and July, we can miss the first few weeks or months of the recovery. Though this may disappoint short term oriented investors, in most cases we have been able to easily “catch up” to this performance gap, over the long run. We feel that this is a small price to pay for the protection from catastrophic loss that our Active Risk Management process offers during bear markets.
Since late this summer the earnings recession has dissipated, the business cycle has reinvigorated and we can confidently say that we are now in the very early stages of a new bull market, which will likely last years, not months. This has very positive implications for you and your wealth.
From Defense to Offense
You may have noticed that our team has been busy transitioning your portfolio from defense to offense since late summer. Most of these changes were directed at making your portfolio more growth oriented to leverage a new bull market. Today’s stock market and economic expansion have all of the hallmarks of a classic early stage bull. Since late summer all of the economically sensitive sectors – financials, materials, industrials, energy and tech – are leading in stock price performance. This is a classic phenomenon at the start of bull markets and we weighted your portfolio heavily toward these sectors prior to the election. This is likely a long term trend for stock markets and we want to make sure that you benefit from it along the way.
Your Asset Allocation
As the bull market progresses, your results will be affected by your portfolio’s total allocation to stocks. A balance of stocks and fixed income reduces your risk, while somewhat muting returns as opposed to an all stock portfolio. We have within our systems a maximum stock exposure percentage set specifically for you or your organization. This may be based on the financial planning that we completed for you, your investment policy or a directive you have provided to us. This is an excellent time to revisit this allocation of stock exposure specifically for you. Though we do not want you to take more risk than you need, we do want to make sure that we have you at the upper end of your risk tolerance for stock exposure to take advantage of the bull market. If you feel that your circumstances have changed in regard to your allocation to stocks, feel free to let us know.
Interest Rates and Bond Prices
Last week Janet Yellen, the Federal Reserve Chairwoman, further confirmed our view of a recovering economy and profit cycle and demonstrated her view by increasing interest rates. We believe that the Fed will have the opportunity to raise rates a number of times in 2017. Rising rates have a negative impact on long maturity bonds and bond funds – neither of which you own. The recent decline in these assets will likely continue into 2017. However, for investors in need of fixed income there is now increasingly attractive opportunity in shorter term individual bonds, which are not as affected by rising rates. If the Fed and the economy stay on course, investors may have a more normal bond market – where yields on 5-year treasuries may be 3.5 -4% – by the end of 2017. We look forward to that possibility.
There is always risk to our view of a more constructive economy and stock market. Therefore we continue to manage your portfolio’s risk through your allocation to stocks, sector exposure and the use of carefully placed stop loss orders.
As a team we welcome this new reinvigorated business cycle and look forward to a profitable 2017 for you! If you have experienced any significant changes in your financial circumstances, please let us know.
Thanks again from all of us for your vote of confidence. If you have any friends or colleagues who you feel may benefit from our services, we would be happy to introduce ourselves to them with a no-obligation introductory meeting. We wish you all a very Happy New Year.
Your Team at Main Street Research