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 be taken along the way to help ensure the best possible outcome. The past couple of years have been a trying time for many around the world, and while the turning of the calendar to 2012 brings a spark of optimism toward the future, we must always be prepared for whatever the financial markets bring our way. I have learned a lot about the markets in these times, and I too share that same optimism about the future, but perhaps for different reasons than many.
These days many are optimistic simply because of the feeling that things in Europe, the economy, etc. just can’t get any worse, right?!? That type of thinking is relegated to those types of people who sit back and let it happen without a proactive approach to navigating the tumultuous markets. I am not optimistic because I think the worst is over or that better times lie ahead; I am optimistic because I have a game plan for managing risk in the financial markets no matter what the future brings. My game plan does not involve listening to the mass media, which often breeds a following of the herd effect, nor does my game plan involve my own gut feeling on the market. The game plan that I adhere to, and will adhere to going forward, is grounded in the basic economic concept of supply and demand. There are times when that means being extremely defensive on the equities market and parking a large chunk of the portfolio in cash, like the market of 2008.
However, there are other times when the equity market is supporting higher prices, like 2009 and 2010, and thus I will have increased, if not over weighted exposure to the equity market. Who knows how the next 12 months will play out, let alone the next 12 years? This is why it is so important for me not to try and predict what is going to happen; rather, I will simply let the market tell me what is happening and take advantage of those opportunities.
There is no doubt, 2011 was a tough and volatile year for the market.
Trends in outperformance were few and far between. Perhaps the only trend that was apparent in 2011 was the trend of volatility. Consider this; during the course of 2011 the S&P 500 experienced three corrections of 10% or more, only to recover from each yet by the end of the year, this equity index finished virtually flat. This means that S&P 500 experienced six swings of 10% or more during the year. That is quite a high number, especially given the fact that from 2003 to 2007 the S&P 500 never so much as saw one 10% correction. History suggests that volatility like this does not persist for extended periods of time, but in the event that it does there are proactive steps that I will continue to take in order to attempt to dampen the overall volatility in your portfolio.
2012 has started off on a positive note, so far. Already there is evidence of emergent trends that I wanted to share with you at this time of the year. With that said, as the New Year is now is full swing, here are the market themes that are in place today.
- Equities have started the year off on a positive note, and when compared to other asset classes, Equities, particularly Domestic Equities, come into the year as the strongest of the asset classes that I follow. Rallies in the equity market in 2011 came in fits and starts, but as we head into 2012 we are doing so with a generally positive foundation. For instance, about 58% of stocks in the market are trading in an overall positive trend, which means that a majority of stocks are trending higher in price. This does not mean we will simply throw a dart and pick stocks or sectors at random, but the weight of the evidence for this asset class is currently positive,
- One of the main positive headlines last year was the record move in the price of Gold, which managed to notch an all-time high of $1,892 in 2011, providing a bright spot for the financial market. However, over the course of the past couple of months there have been some troubling signs for the yellow metal, not only in terms of absolute price, but in terms of strength versus other commodities. One of the beneficiaries within the Commodity space from the weakness seen from Gold has been Crude Oil. The price of a barrel of Oil has crossed back above the $100 level. Undoubtedly, an increase in the Oil price will translate to higher prices at the pump; however, there are ways to benefit from higher Energy prices in your investment portfolio.
- International Equities was the worst performing asset class last year, and the indicators I followed had this group falling out of favor in the fall of 2010. Over the first few weeks of 2012, though, this is an asset class that has been showing some positive signs. For instance, trends of some of the bigger countries are showing some promise as areas like China, Brazil, and even some of the European countries are moving back into positive trends. This will continue to be an area to watch closely and as the positive signs continue to mount we will begin to allocate a bigger percent of the portfolio across the pond. Times when it feels like the worst time to be buying, as is the case now with everything going on especially in Europe, often ends up being one of the better times to allocate money to that space.
If you have any questions about the particulars of your portfolio, or would like to discuss the potential opportunities that I have seen arise within the equity market, please give me a call. In the meantime, Happy New Year!
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. Investing in Emerging Markets often accentuates these risks.
Investing in precious metals allows for a source of diversification for those sophisticated persons who wish to add precious metals to their portfolios and who are prepared to assume the risks inherent in the bullion market. Any bullion or coin purchase represents a transaction in a non-income-producing commodity and is highly speculative.
Buying commodities allows for a source of diversification for those sophisticated persons who wish to add commodities to their portfolios and who are prepared to assume the risks inherent in the commodities market. Any purchase represents a transaction in a non-income-producing commodity and is highly speculative. Therefore, commodities should not represent a significant portion of an individual’s portfolio.
Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be attained.
The S&P 500 is an unmanaged index of 500 widely held stocks. You cannot invest directly in the index.