It has been a tumultuous third quarter with the Standard and Poor’s (S&P) 500 index down 15% since mid-July. Essentially, global markets have largely priced in a recession. Indeed sentiment data, like consumer confidence, has been decidedly negative, but key economic data has been positive. Last week the Labor Department reported solid gains in jobs and revised the previous month’s estimates higher as well. Also, the Institute of Supply Management (ISM) data confirmed a slowly expanding economy. In fact, estimates for third quarter growth are in the 2 to 2 ½% range – hardly a recession.
So what’s creating all the angst and volatility and what are we doing about it?
Clearly, concerns about ineffective policies, here and abroad, to deal with European debt problems and sputtering US growth and job concerns are the chief culprits. Fortunately, it looks like Europe is getting serious about its sovereign debt issues. Recently, they authorized a US-style TARP fund to ensure its banks will remain solvent. But they’re not out of the woods yet. And, unfortunately, because next year’s elections are looming, US policy decisions remain fractured and politically motivated. Therefore, we believe volatility will continue over the next year.
Our response? We want to hedge portfolios against excessive volatility. In fact we believe we can even potentially profit from it. In order to try and accomplish this, we’ve done two things. First, we sold a position that was diversely invested but typically actively hedged against downturns. However, through the summer decline, it essentially did no hedging. So we made the decision to try to better position the money. Second, with the proceeds of the sale, we’ve worked to identity an opportunity to try and use the volatility of the S&P index to our advantage. This index volatility typically rises with concerns about recessions, debt crises, oil price shocks, natural disasters, terror attacks, and policy mistakes. Because it is complicated, however, we intend to speak to every client before implementing it in your portfolio.
The other action we have recently taken is to reestablish our position in an investment similar to the one we took profits in last June. We feel slow growth and profitability will continue despite policy concerns. Since we sold our unhedged position last month, we feel we need reasonable exposure to growth and convertible bonds.
In summary, it has been an interesting last month or two. However, we not only have a plan for continued slow growth and volatile markets, we are executing it in a way that attempts to manage risk and take advantage of opportunities. We plan to contact everyone affected by our strategy change. In the meantime, of course, feel free to contact or call us to initiate discussion or with questions or concerns. We always appreciate hearing from you.
Best regards,
Donald J. Miller, CFP®
LPL Registered Principal
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
This entry was posted
on Tuesday, October 18th, 2011 at 3:11 pm and is filed under Market Commentary.
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October Market Commentary
It has been a tumultuous third quarter with the Standard and Poor’s (S&P) 500 index down 15% since mid-July. Essentially, global markets have largely priced in a recession. Indeed sentiment data, like consumer confidence, has been decidedly negative, but key economic data has been positive. Last week the Labor Department reported solid gains in jobs and revised the previous month’s estimates higher as well. Also, the Institute of Supply Management (ISM) data confirmed a slowly expanding economy. In fact, estimates for third quarter growth are in the 2 to 2 ½% range – hardly a recession.
So what’s creating all the angst and volatility and what are we doing about it?
Clearly, concerns about ineffective policies, here and abroad, to deal with European debt problems and sputtering US growth and job concerns are the chief culprits. Fortunately, it looks like Europe is getting serious about its sovereign debt issues. Recently, they authorized a US-style TARP fund to ensure its banks will remain solvent. But they’re not out of the woods yet. And, unfortunately, because next year’s elections are looming, US policy decisions remain fractured and politically motivated. Therefore, we believe volatility will continue over the next year.
Our response? We want to hedge portfolios against excessive volatility. In fact we believe we can even potentially profit from it. In order to try and accomplish this, we’ve done two things. First, we sold a position that was diversely invested but typically actively hedged against downturns. However, through the summer decline, it essentially did no hedging. So we made the decision to try to better position the money. Second, with the proceeds of the sale, we’ve worked to identity an opportunity to try and use the volatility of the S&P index to our advantage. This index volatility typically rises with concerns about recessions, debt crises, oil price shocks, natural disasters, terror attacks, and policy mistakes. Because it is complicated, however, we intend to speak to every client before implementing it in your portfolio.
The other action we have recently taken is to reestablish our position in an investment similar to the one we took profits in last June. We feel slow growth and profitability will continue despite policy concerns. Since we sold our unhedged position last month, we feel we need reasonable exposure to growth and convertible bonds.
In summary, it has been an interesting last month or two. However, we not only have a plan for continued slow growth and volatile markets, we are executing it in a way that attempts to manage risk and take advantage of opportunities. We plan to contact everyone affected by our strategy change. In the meantime, of course, feel free to contact or call us to initiate discussion or with questions or concerns. We always appreciate hearing from you.
Best regards,
Donald J. Miller, CFP®
LPL Registered Principal
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
This entry was posted on Tuesday, October 18th, 2011 at 3:11 pm and is filed under Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.