The stock market has recently hit all-time highs! This feat comes with the S&P 500 having taken a 413 day pause from record levels and spending a majority of the past year in a trading range of 1900 to 2100. With inflation below the Federal Reserve’s target of 2%, a projected low interest rate environment, and an accommodative Federal Reserve monetary policy, we feel stocks are likely to stay near current valuations. However, it is extremely important to employ a proper selection process of which stocks and sectors to be in. Additionally, since this Bull Market is the second longest in history, lasting 87 months, we currently feel that the markets are at the high end of the trading range. As such we have been utilizing call options to protect and add to our profits.
Stock market corrections are an integral part of the health-restoring process during an extended bull market run. Investors withdrew $80 Billion from stock mutual funds during the first half of 2016 as investors worried about growth, interest rates, and China. It has been proven that stocks often “climb a wall of worry,” referring to the financial markets’ periodic tendency to surmount a host of negative factors and keep ascending. Those worries currently include: receding corporate earnings growth, higher than average stock valuations, a stronger US dollar, ongoing geopolitical events, diminishing effectiveness of loose monetary policy, and an ever widening debt load. Let us also not forget that Chinese economy will remain a wildcard and the US is in the midst of a Presidential election.
The latest example of the wrong reason to hurriedly sell stocks came with the United Kingdom voting to leave the European Union on June 23. In a rush, global stocks saw a sharp 7% two-day decline followed by a rebound which was nearly as dramatic. We have reiterated in numerous blogs that dips in the market would be seen as buying opportunities and this was no exception. As stock prices dropped, we scooped up bargains. In aggregate, millions of dollars of cash-on-hand was put to work in our managed accounts. This decision was made by the investment team because the vote actually triggered nothing official and the UK still remains a part of the EU. To the disappointment of the bears the vote has not resulted in a sustained market collapse. No one knows how long the exit process will take, but negotiations could continue for up to two years. While two years of uncertainty seems like a long time, it also means there’s ample time for markets to understand the impacts of new details, rather than being caught off guard as they were for the initial vote.
Furthermore, political uncertainty has been reduced with Theresa May’s fast-tracked appointment as Prime Minister and the Bank of England has already loosened monetary policy to support markets. Ultimately, the amount of economic downturn there will be in the UK, if any, will depend critically on what kind of deal the UK can negotiate in relation to the EU’s four freedoms (trade in goods, services and capital, and the free movement of people) after it triggers Article 50 of the Lisbon Treaty to exit the EU. So while the British were frantically Googling “What is the EU?” only hours after voting to leave it, we were following the motto of “Keep Calm and Invest Wisely.”
We believe that the markets will remain steady through the election. Resiliency in the market has come from positive consumer spending, higher wages, encouraging housing and employment data. Despite major concerns posed earlier in the year, recessional risks are minimal and broadly positive economic reports for June, including strong retail sales and industrial production, show the economy closed Q2 on solid footing before Brexit.
Volatility is a fundamental component of investing. Our active management strategies manage such volatility in various ways. Where appropriate, implementation may include holding less-risky stocks, selling options to generate income, shifting asset class and sector exposures, or holding excess cash. We utilize these strategies in an effort to provide a smoother stream of returns, as well as better risk-adjusted returns. By managing volatility in the investment portfolios, this may help increase consistency of returns during the accumulation phase and longer-lasting income stream during retirement. As investment advisors, our focus starts and ends with you. By beginning the process with an understanding of your financial resources, current and future expectations, and most meaningful values and goals, we are able to proceed with prudent investment management. We want to maximize your returns with minimum risk that works for your financial profile. If you are preparing for retirement, acclimating to or anticipating a change in lifestyle, believe that your goals have changed, or are simply looking for a financial roadmap update, please know that we are here to keep your financial goals on track.