elmwood wealth market update
DESCRIPTION
Time to take some risk off the table, as we believe the economy and stock market will slow in the short-term.TRANSCRIPT
We Build and Preserve Wealth
Financial Planning Portfolio Management Tax & Estate Services
2027 Fourth St., suite 203
Berkeley, CA 94710 (510) 858-2723
www.ElmwoodWealth.com
Elmwood Wealth Management
Time to Take Less Risk
Investors have had much to worry about over the past few years. Recurring problems in Europe, a slowdown in China, a U.S. presidential election, the Fiscal Cliff, and now the potential ramifications of the Sequester all have led to a lack of confidence and visibility in our economy. Progress has been made on many of these issues and this has led to a near 20% rally in the U.S. stock market since November 15, 2012.
There are still challenges out there, and bullish investor sentiment clearly is not taking these into consideration. At right is a chart of the NAAIM survey, which is derived from professional money managers’ responses. The purple spike over 100 represents the highest bullish manager reading in the past 2 years. In fact, it’s the highest since January 2007 when our economy seemingly had no problems and the sub-prime mortgage flare up was “contained”. We view this over optimistic level of bullishness as a signal to be cautious.
Market Update: February 22, 2013
The Leading Indicators
A well know private institution called the Economic Cycle Institute of Research publishes a weekly leading indicator for the economy. To calculate their index, they take into consideration things like factory output, employment, income and sales. All factors are sensible and uncontroversial measures. Their goal is to predict changes in the business cycle, and they historically have had a very successful track record in this regard.
In their weekly report just issued today, their weekly index has slowed for the second time in a row. This may not seem like a big deal, but these turns usually only come about once or twice a year. In fact, the last time there was a directional change (positive) was last November, and the market responded accordingly. Even though our economy is still growing, it appears to be slowing, and the stock market is an animal that feeds off of momentum. Another caution signal.
Our Investment Strategy
We have outlined a couple of reasons to reduce investment risk in the short-term, and we are acting on this premise. Over the past ten days we have been reducing high volatility stocks in favor of those with more stability. We are also reducing foreign emerging market exposure, mostly through a reduction of investments in China, to further pare back on high risk, high reward situations.
In the intermediate to long-term, we remain positive on the overall investment climate and feel there are ample opportunities for investors. We are particularly interested in building up additional exposure in the health care and energy sectors, as we have little doubt these areas will become an increasingly larger part of our economy. In the last few years, corrections in the market have typically lasted two to four months. We have no reason to believe at present it will be any different this time around.
Bob Gillooly [email protected] Shannon Lemon [email protected] Steve Caltagirone [email protected]