By: Thomas A. Martin, CFA, Senior Portfolio Manager
Not that there aren’t things to worry about. In the near-term, perhaps the biggest worry is that the S&P 500 has run back up from its August-thru-October correction to new highs for the year in less than six weeks. Not only that, it is all the way back to an all-time high on a total return basis—the drawdown lasted two years and is now over. Accompanying this move has been an equally fast change in investor sentiment from bearish to bullish and it now is on the border of the contrarian danger zone according to some measures. At the same time, interest rates have staged an impressive rally all the way from 5.0% down to 4.15%, along with marked change in narrative from “everything points to higher rates” to “everything now points to lower rates.” These moves incorporate a lot of good news and more expected good news. The question is how much is fully discounted already?
But there are many positives. The secular bull market in equities is still intact. This is necessarily the corollary to the move back to a new all-time high. Despite the 2022 cyclical bear market, the U.S. economy has not even come close to a recession and many other fundamental underpinnings of the market remain strong. Corporate earnings are back to growing, and double-digit EPS gain expectations are holding for 2024 followed by continued growth in 2025. Inflation is beginning to put together sustainable evidence of getting to a durable low level that will be much more comfortable for consumers, businesses, and investors alike. At the same time, employment is edging closer to fully normalized, and continues to power an ongoing strong consumer willing and able to spend. This combination is expected to help the Fed not to raise rates any further, and later to potentially lower rates from restrictive down to neutral, and hopefully forestalling any further damage from high rates and interest costs to banks, the real estate industry, and borrowers in general. As unusual in the course of history as this set up is, if it comes to pass, it may not be fully discounted, and markets, both bond and stock, may have further to run.
It won’t be a straight line. And that is what tends to shake some investors out of the market, going from fully invested to out-of-the market when they get uncomfortable. We still have a huge amount of debt. There still will be a lot of Treasury issuance. Congress is still dysfunctional in the sense of being able to rein in spending and pursue policies that promote labor productivity and sensible risk taking. Real estate markets are still at the early stages of major secular and cultural changes. These items, plus the many we won’t even see coming, still have the possibility of changing market risk tolerance on a dime.
Big moves in and out of the market are hard to time. It’s the easiest way to get offsides, and then the error of getting out and then the market goes higher, can get compounded by the error of getting back in at a near term top and then the market goes down. This only serves to increase discomfort.
Moderate over and underweights to asset classes mitigate the risk of big-call-gone-wrong mistakes. Having the right risk mix of assets to suit an investor’s needs is the key. Starting off from a place of sensible diversification and understanding that it is meant to continue to meet those needs under most of the circumstances the market brings in the future can help investors to avoid these mistakes.
Our Asset Allocation strategies adjust asset class weights dynamically. GLOBALT’s strategies are constructed to give our clients the starting place that is right for them. Our trades and position changes then make incremental moves to try to mitigate risks and improve returns versus the baseline. Currently, we remain overweight US stocks and growth and underweight bonds. We continue to maintain our counter-risk assets of gold and a small overweight to cash.
Best to all our GLOBALT clients, friends and families for a wonderful holiday season and a happy New Year!
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The opinions and some comments contained herein reflect the judgment of the author, as of the date noted.
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