Another month of largely positive market action pushed all of our firm’s managed portfolios higher during February. The current rising price trend has been intact since mid-September of last year, and has required only minimal adjustments during this period. With the U.S. and other developed economies demonstrating ongoing economic stability (and even a bit of growth), the markets have tacked on additional gains to start the year. For the month, our position in U.S. Large Cap Value equities (IWD) rose 3.79%, U.S. Large Cap Growth (QQQQ) advanced by 3.16%, and U.S. Real Estate (IYR) added a solid 4.52%. In addition, U.S. Basic Materials (XLB) rose by 2.66% and High Yield Bonds (JNK) tacked on a more modest 1.35%. Throw a dart at practically any domestic asset class and the story is the same.
Overseas investing, however, has been a laggard so far this year. One might believe that the turmoil in the middle-east is the root cause, but the real story isn’t in energy – it’s food. Prices for grains, dairy, meats and other food staples have been rising sharply in many overseas markets, most notably in the Asian mega-economies of China and India. In many emerging markets, food costs can eat up as much as 25% of a typical family’s monthly income. And with fuel costs rising sharply due to concerns over production in Libya, inflation overseas runs the risk of getting out of control.
China has already raised interest rates twice in 2011 in an effort to cool down an overheated economy that may grow as much as four times faster than the U.S. this year. Concerns over slowing emerging markets growth has prompted institutional investors to shift assets back to the U.S. and developed Europe. The “wisdom of the crowd” and her trading activities shows up clearly in the year-to-date performance of the Vanguard MSCI Emerging Markets ETF (VWO), which through yesterday is down 4.6% for the year. This is one market segment that we’ve eliminated from our portfolios over the past few weeks, and in our PLUS and Tax Managed Growth portfolios is now positioned in a “bear market” ETF (symbol EEV – engineered to profit from declining market prices). Time will tell if the market deterioration will turn into anything more significant; if not, we will reallocate a standard portion of our portfolios back to this area once the market has found its footing.
The overall investment posture of our managed portfolios is moderately bullish at the present time, ranging anywhere from 50-70% invested in assets that participate in their respective market segments. The market is clearly signaling that while the headlines of the day aren’t always great (but when in the past decade have they been?), most institutional investors are content to ride the current trend higher. We won’t argue right now.
Our preference is to be fully invested at all times, and we know from experience that this posture can be both extremely advantageous, and plenty exciting to boot! I personally find it interesting to gauge the sentiment of many individual investors as we approach the higher end of the range that the U.S. markets have been stuck in for the past 11 years. As was the case in early 2000 and again in late 2007 (both anniversaries of market highs), it seems that many investors consistently desire to venture further out on the risk spectrum just at the time that the markets are getting ready to change direction. Perhaps its the feeling of “missing out,” but with the average return of the U.S. markets near zero over the past 11 years, we’re really not missing out on anything substantial. I’ve always believed that we are still in the era of big moves, both up and down. While the markets are in no way signaling that the recovery of the last few years is reversing itself, I believe it’s always beneficial to examine ways to turn fear into an advantage, and greed into a non-factor.
So here’s our current “bird’s eye view” of the markets – our five-year ETF charts with both their respective short- and long-term trendlines. With the aforementioned exception of emerging markets, you can see that all major market segments remain firmly in a rising trend environment.
As always, I welcome your comments and thoughts…