As we approach Labor Day and look ahead to the final four months of the year, investors would be prudent to assess the state of the markets. By analyzing both opportunity and risk right now, you can make the moves you need to stay within a rational portfolio plan.
2013 has been characterized by significant changes in stocks, bonds and commodities that likely have made an impact on your expectations for future returns. The shifting dynamics among these asset classes means you’ll have to get proactive to navigate these murky waters.
Global Macro View
From an economic standpoint, the data continues to point to positive trends. U.S. second-quarter GDP was recently revised up to 2.5% from an initial reading of 1.7%, and the markets reacted favorably. Job numbers continue to remain stable, and we have yet to see the full impact of rising interest rates on consumers.
These are all net positives for the domestic economic picture and point to a confirmation of the Fed’s plan to taper its asset purchases sometime this year. We all knew the free money train was going to come to an end; we might find out how soon in September.
From a geopolitical context, the picture is much darker. We face the potential for conflict with Syria, which has spooked the markets and sent energy prices higher. In addition, we are seeing continued weakness in emerging-markets stocks, bonds and currencies, which does not bode well for overseas investments. All of these factors could create a spillover effect into U.S. markets if conditions continue to worsen.
Stocks: Make the Most of This Pullback
Click to Enlarge The domestic stock market has had a fantastic run this year. The SPDR S&P 500 ETF (SPY) has risen 15% year-to-date, and that’s after August’s retreat. Currently the bellwether large-cap index is sitting just below its 50-day moving average.
Logic would dictate that a larger correction between 5%-10% was long overdue, but stocks — while still pulling back somewhat — have been amazingly resilient.
I believe stocks’ current weakness will worsen if we see a lack of conviction on the buy side, combined with additional policy shift from the Fed or an escalation of international conflict. However, any additional weakness should be viewed as a buying opportunity for cash on the sidelines.
I have been using this pullback to add small positions in low-risk equity holdings such as the iShares U.S. Minimum Volatility ETF (USMV). Another sector that has outperformed considerably is technology stocks, with the re-emergence of Apple (AAPL) keeping the PowerShares QQQ (QQQ) close to its year-to-date highs.
Keep in mind that any new positions should be added with small allocations that you average into by using additional weakness to your advantage. In addition, you should be mindful of the long-term trendlines, and use stop-losses to define your risk.
Bonds: The Most Hated Correction of All Time
Without a doubt, the move in interest rates this year has been a shock to income investors that had grown accustomed to safe and steady returns in their bond funds. In addition, interest-rate-sensitive investment vehicles such as REITs, preferred stocks and utilities have all been stung by higher Treasury yields.