2010Jan18 Market Themes for 2010“When it comes to the future, there are three kinds of people: those who let it happen, those who make it happen, and those who wonder what happened.”
~ John M. Richardson, Jr.
While there is no way to predict what the future holds for our lives, the financial markets, or even the economy, there are actions that can help improve outcomes. The past few years have been trying for many around the world. While the turning of the calendar brings a spark of optimism for the future, we must still be prepared for whatever the financial markets bring our way. We have learned a lot more about the markets in the past two years. We do share optimism about the future, but perhaps for different reasons than many.
Some are optimistic simply because they feel that “things just can’t get any worse.” That type of thinking is relegated to people “who let it happen”, as suggested by the quote from Mr. Richardson. We are not optimistic because we think the worst of the storm is over or that better times lie ahead. We remain concerned over the demographic spending changes that are still in front of us and the increasingly unbelievable federal debt.
We are optimistic because we have a plan for dealing with the risk in the financial markets no matter what the future brings. Our plan is grounded in the basic economic concept of supply and demand. There are times to be defensive in the equities market and park a large chunk of the portfolio in cash. That does not happen with typical asset allocation strategies. There are other times when the equity markets support higher prices. At those times, exposure to the equity market can be worth the risks of stock ownership.
Who knows how the next 12 months will play out? That is why it is important to not invest on what “should” happen. Rather, the market will tell us what is happening by observing buyers and sellers. Each day is an auction. We can take advantage of opportunities by identifying where buyers are pushing prices higher.
With the New Year is in full swing, here are the market themes that are in place today.
Market Themes Starting Off 2010:
· The stock market continues to support higher prices, at least for the time being. The long term trends of all of the major indices, like the Dow Jones Industrial Average and the S&P 500 remain positive. Currently, 76% of all stocks on the New York Stock Exchange are in an overall positive trend. This is healthy sign for the market. There is no way to know how long this will last. Trends in the market do tend to be longer term in nature. For instance, the overall trend of the S&P 500 was positive for almost 5 years before turning negative in 2008.
· International equities continue to present opportunities. Both domestic and international equities are currently strong asset classes. Interestingly, a comparison of all investable countries around the world reveals the strongest markets can be found outside of the US.
· Commodity related equities remain strong. You probably know about the record high prices in Gold in 2009. However, Silver has actually been a more rewarding asset. There is nothing to suggest that the trend in Gold, or any of the metals for that matter, is over though they are no longer asset leaders. With the advent of Exchange Traded Funds, gaining exposure to commodities is now quite easy. Modern Portfolio Theory generally excludes commodities from an asset allocation model. Dynamic Asset Level Investing adjusts portfolios to the current market environment instead of anchoring a model to decades of irrelevant history. While we have inserted gold and silver ETFs into our model, we currently are buyers of other assets with better trends.
· Many of these themes have a common denominator – a weak US Dollar. International equities tend to do better when the US Dollar is weak, as do commodities. Even the strength in our equity market can be traced to the weakness in the US Dollar. One of the better performing sectors during weak dollar environments is Basic Materials. Growth areas of the market, like Technology, generally do well with a weak Dollar. However, despite the recent bounce in the Dollar, its long term trend remains negative.
High frequency trading is increasingly affecting global markets. Portfolios must be flexible to reflect the ever changing market environment. Pie chart asset allocation models based on 30-year averages are inadequate in today’s market.
We use objective data to manage portfolios tactically, focusing on the most important component - price changes created by supply and demand. We have examined 20 retirement plans using supply and demand price analysis. In every case, portfolios would have fared better in October 2008 if they had been adjusted for the changes in supply and demand. The results are posted on our web site. If you would like to discuss how your portfolio is positioned for a changing market, call us at 800-317-9119.
On January 16th, we aired an interview with Ken Gronbach, author of The Age Curve. As a demographer, he identified very profitable market segments last year and generated a +79% return in his model portfolio. His portfolio and a free copy of his 2010 Market Outlook are available on our web site.
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