The New Year got off to a shaky start last week as all of the major stock market averages saw significant declines. The Dow Jones Industrial Average fell sharply on Wednesday with a -1.7% decline followed by Friday’s -1.9% drubbing as a result of a surprisingly weak jobs report. The sell off on Wednesday was the worst opening day percentage loss since 1983. For the week the Dow crumbled, losing 566 points (-4.2%) and closing at 12,800.
On a percentage basis, the NASDAQ saw an even larger decline than the Dow as last year’s rally in large tech stocks failed to carry over into 2008. On Friday, the index fell beneath the low recorded on November 26th of last year is now dangerously close to falling below critical levels of support. For the period, the NASDAQ lost 170 points (-6.3%) as it closed at 2504.
The overall market declines were a result of an increasingly weak economic environment coupled with renewed inflation fears – a double whammy that requires attention.
The Appleton Group Composites™
Despite the market weakness, the year is off to a solid start for The Appleton Group Wealth Management Discipline. Our prudently defensive asset allocation has enabled us to take advantage of the recent market weakness, both by experiencing smaller portfolio declines and/or by profiting from the recent weakness (depending on the portfolio). In essence, our discipline is a trend-following portfolio management strategy. Given the presence of a sustainable trend (either up or down), our discipline can add significant value either by producing sizable gains or by limiting losses (which in itself is a tremendous value). Without a sustainable trend, our discipline simply won’t produce a lot of extra value, however. To be sure, an environment in which a sustainable market trend exists is far more common that any sort of a trend less environment, as the overall market has demonstrated double-digit advances or declines in 11 out of the past 13 years. The two flat years have happened to occur most recently, and we believe are an aberration. Many of our portfolios had become out-of-balance over the last year, and so we’ve rebalanced as appropriate, selling pieces of the portfolio that have outperformed and buying more of those pieces that have underperformed.
Should the current downward trend continue, we would expect to see meaningful separation between the overall market and client portfolios. To be sure, the recipe for a meaningful market move is present. Just what direction it decides to take is still unclear. On the positive side, interest rates are low, we seem to have a proactive Federal Reserve, and the overall global economy is still strong. On the negative side, the five-year global economic expansion is clearly under stress, the extra bump in corporate profits from the collapse of the dollar is likely to reverse, inflation is picking up, and my wife’s hip hurts. Clearly, something important will happen soon…
Please visit www.appletongrouponline.com to learn more about The Appleton Group Composites™.