Since the fourth quarter of 2014, stock indexes have been “stuck” in a very wide and volatile range. Recently, however, some stock indexes have managed to hit – albeit quite marginally – new highs. Is this a sign that a new bull market is upon us? If so, how should investors position their investment portfolios?
As we mentioned in our previous Strategy Update, we believe that most of the recent “teddy bear” market is behind us, and that at some point in the coming quarters, a new bull market may be upon us. Though the media attention of “stocks hitting new highs” can create excitement, investors should be reminded that these indexes are just barely above their old highs – a couple of percentage points at best. Nonetheless, every bull market has to start somewhere and though it may be too early to call, we just might be at or near the beginning of a better and much more profitable environment for stock investors.
Throughout 2015 and early 2016, our goal was to be more defensive with your portfolio by having less stock exposure and overweighting consumer staples, healthcare and utility stocks – a strategy that served us well. However, given our optimism about the future direction of stock prices, since May we have been more focused on domestic and foreign growth stocks and have been slowly adding them to your portfolio. This has included additions in energy, industrials, consumer discretionary and real estate sectors. We are excited about the growth prospects for these great companies and have a list of others that we look forward to adding to your portfolio that includes some unique technology and material companies. Ideally, we would like to purchase these new positions for you on weakness to provide you with better performance so patience is a necessity – days and weeks, not months.
The implication of a stronger stock market in coming years bodes well for the eventuality of higher interest rates at some point in the next few quarters. Although this would be bad news for bond funds and long maturity bonds, it would be very good news for those of us that would like to buy bonds that offer real value. Just imagine a 5 year treasury at a 3% annual yield. We haven’t seen that for ten years!
Though we continue to be more optimistic in our outlook and are prepared for a better investment environment, it is always possible that it may get worse before it gets better. Therefore, as we actively invest for growth, we will do so carefully and patiently. Moreover, we will continue to manage your portfolio’s risk through your asset allocation, sector management and the use of carefully placed stop loss orders.
We hope this update finds you well. If you have any questions or would like to review your portfolio, please let us know. If you have experienced any significant changes in your financial condition, please provide us with an update. Thanks from all of us for your continued vote of confidence.
Sincerely,
Your Team at Main Street Research