The first half of the year delivered superior returns for the US Stock Market as measured by the S&P 500 (+9.3%), but as we entered into the doldrums of Summer, that torrid pace slowed down considerably. June was a relatively flat month and the first few weeks of July have looked similar. While a strong first half typically follows with a strong second half (See Chart), a summer pullback or continued consolidation would be healthy. That said, as we look to the chart once again, the trend is our friend and as we’ve learned throughout the years, you don’t fight it.
It’s become a common theme in our newsletters where we like to remind investors (as well as ourselves sometimes) to take a step back from the headline news to examine where we really are in the current Bull Market cycle. While the news is constantly talking about a pending market top and subsequent drop, history shows us that we need to stay calm and, as the popular 80’s hit by Frankie Goes to Hollywood says, “Relax!”
2016 was a year in which political surprises dominated global headlines. From Brexit to Donald Trump, populism gained momentum around the world shocking insiders, giving hope to outsiders, and leaving market pundits to figure out what this all means for the future. Despite everything that happened, the S&P 500 still managed to finish the year up 12% on a total return basis. In spite of the uncertainty, the resiliency of this bull market shows that underneath it all, market fundamentals still look very strong. These market conditions show that there is still room for the bull run to continue in 2017, but as we have all come to learn, the unpredictable nature of our new President leaves us wondering what surprises he will have in store for us next.
As John Maynard Keynes so eloquently put in his book “The General Theory of Employment, Interest and Money” nearly 80 years ago, investing is about the long term. If we just thought of investing like so many other long term focuses in our lives, we would all no doubt be better at it. Our job as wealth managers, not investment managers, is to make sure that our clients continue to take a longer term view and keep the “contemporary evils” from getting in the way of sound advice. Despite our long term focus, as investment managers in addition to wealth managers, we must also keep an eye on the near term to either protect against a downturn or seize opportunities in the ever-changing market environment. While long term we see troubling issues facing global markets and economies, there may be some near term opportunities which we will address.
Overall, market fundamentals are in good but not great shape. Worldwide economies are slowing and uncertainty continues to dominate headlines, but it’s not a reason to head for the hills. In addition, with a backdrop of continued low interest rates (either next to nothing or negative), equities continue to be the only game in town. So while there is a lot to be worried about, the thing that is most in favor of rising stock prices is the fact that in public markets worldwide, There Is No Alternative (TINA) to invest in.
Here’s what happened:
Yesterday, UK voters elected to leave the European Union (EU) – the “Brexit”. As a result, market volatility has increased sharply. While the “Brexit” referendum won last night, the process of leaving will be long and arduous. Many are predicting that it will take more than two years. So the sell-off today is more so about the uncertainty that comes with “now what!?!”
Expect continued volatility and wild swings as it will take time to sort all of this out, but long term we feel that this has the potential to create extremely attractive buying opportunities. There’s no real change in the way the United States will do business, and, in reality, while there will be some growing pains, the UK was really just a fringe member of the EU anyways. It had its own currency, immigration laws, and a laundry list of exemptions from EU rules.
Here’s how our accounts are positioned:
Over the past few months we have been raising cash across accounts by cutting equity exposure as the stock market hovered around all-time highs. We felt that the downside risk of being heavily invested in the stock market far outweighed the potential upside. While arguably “early”, we did this in anticipation of a pull-back. With the “Brexit” vote, it appears that we may be getting the decline and potential entry point that we have been waiting for to put that cash to work. As the next few months start to provide more clarity, we plan to capitalize on attractive investment opportunities created by the decline. In addition to lower equity exposure, we are well positioned within our bond and alternative allocations.
Important things to remember:
- Uncertainty about what’s next will continue, therefore, so will volatility.
- We’ve been raising cash and are more conservatively positioned than we have been in years.
- This news and the subsequent downward move has the potential of creating extremely attractive buying opportunities to put that cash to work.