Why do I write blogs twice a week (other than in market emergencies), rather than every day, the way some commentators do? There’s a good reason. Not only would it drive me crazy; it would do the same to you!
I’ve noticed a persistent phenomenon among the daily bloggers. They’re highly distracted by the day-to-day noise of the markets, which prevents them from focusing on the really big (and important) trends. As a result, these folks’ opinions often spin around faster than a weathervane in a tornado.
Truth is, it usually takes several days, sometimes considerably longer, to figure out whether a market trend has shifted (or whether a particular piece of news is as significant as the “instant analysis” crowd believes). By giving yourself a little time to observe and reflect, you can make better investment decisions, with fewer costly blunders.
Since last week, when the most recent European Union summit wrapped up, financial markets have breathed a deep sigh of relief and U.S. stocks (basis the S&P 500 index) have climbed. Now we can legitimately step back and ask whether anything fundamental has changed.
On the plus side, it seems clear that Europe has bought itself some more time — perhaps one to three months — to work on longer-term solutions to the continent’s banking and sovereign-debt problems. The near-panic conditions that prevailed in the Spanish and Italian bond markets have eased.
Consequently, I suspect that the second-half stock rally I predicted in the July newsletter has, in fact, begun. Our hedge via the ProShares UltraShort S&P 500 Fund (NYSE:SDS) was stopped out Friday, and I don’t plan to reinstate it in the near term unless my indicators were to deteriorate markedly.
At the same time, I harbor reservations about how long this new upswing in equities might last, and how far it might carry. The Europeans have unleashed plenty of high-flown rhetoric in the past two years, but concrete progress has fallen short.
Should the financial markets sense that the EU is using another round of bailouts merely to delay needed reforms, confidence could unravel again. What’s more, the world isn’t in a good spot, right now, to absorb such a blow: Economic growth is tailing off almost everywhere, even in the United States (witness the surprisingly weak 49.7 reading on the ISM purchasing managers index for June).
So I’m leaving our model portfolio’s asset allocation unchanged at 51% stocks, 49% fixed income. That’s well below the 60% we earmark for stocks under “normal” circumstances. We’re not living in normal times, and a return to normalcy in 2012 appears unlikely.