Portfolio Update – 8/5/2011

The rapid and sizable market correction underway has triggered several portfolio adjustments, with the high probability that more may be required if the market cannot find its footing very soon.  Yesterday’s five-percent declines spared no growth sector of the markets – dividend-paying stocks declined as much as growth stocks; large, mid and small cap stocks all performed the same, and international equities saw even deeper declines than their U.S. counterparts.   Real estate – which had been on a solid run since July of 2009 – is also seeing sharp deterioration (Fannie Mae requested another $2 billion in taxpayer money just this morning – not a good sign for the housing market).  For most securities, the upward trends that started in September of last year have run their course and are quickly deteriorating.

For our clients that need assets today (those in retirement taking monthly income streams), we’ve already carved out many months – even several years – of bonds and cash to secure their income streams.  Its important to recognize that over the past two weeks these assets have appreciated in value, exactly as planned.  We’ve used this structure intentionally for years.  The remainder of these accounts is invested in our core portfolios for longer-term growth, and will fluctuate in value in response to changing market trends.

Our investment goal with all of our firm’s core portfolios (Appleton Group Portfolio, Appleton Group PLUS and Appleton Group Tax Managed Growth Portfolios) has always been to participate in the equity markets while limiting losses in any calendar year to just single digits.  We’ve reached the midpoint of that threshold along with the markets in just a two week span, and our adjustments are pretty much right on schedule.  Within the next week our total market exposure will likely range from only 40% to as little as zero (with two positions still invested and two or three bear market positions offsetting risk in PLUS and Tax Managed Growth). We will make further adjustments as warranted.   If the markets continue to decline, we will eliminate our remaining invested positions, carrying either a full cash position in the case of the Appleton Group Portfolio or as much as a -45% “bear market” posture to potentially profit from further market declines.

So what happens next for the markets?  The bottom of the eleven-year market range is around Dow 7000, and any further economic weakness would almost certainly bring us toward the bottom of that range.  All of our trendlines are looking eerily like they did in October of 2007: short-term trends crossing below long-term trends, with prices declining markedly.  We’ve seen this before.  We have a plan (as we’ve had for years), and that plan is being executed exactly as we intended.  It is my firm belief that “buy and hold” investors who experienced the -55% portfolio declines (or more) back in 2008-09 will take action much earlier now than they did then, not wishing to experience that kind of volatility once again.  If true, the market declines this time around could be much more severe and potentially much more helpful to OUR clients.

I’m not at all surprised to see the markets turning – but admittedly they’ve turned faster than we’d like.  If a sustained market decline does take hold and brings us back to Dow 7000, we’d be looking at a 40% decline or so from here.  As I wrote yesterday, we could see an explosion of value in the bear market funds that we use (the trends here are just starting to turn positive with a lot of room to run to get back to the top of their price trends from 2008-09).

But expect a bumpy ride for a while…

By | 2011-08-05T11:37:37+00:00 August 5th, 2011|Market and Portfolio Commentary|Comments Off on Portfolio Update – 8/5/2011

About the Author:

Mark’s commitment to objective, independent wealth management led him to establish The Appleton Group LLC in April of 2002. With over 19 years of experience in the financial services industry, Mark serves as portfolio manager for our private client group, and co-manages all assets held in our suite of portfolio offerings. His responsibilities include risk analysis, asset allocation, market research, and institutional client development. Mark also serves as both Principal and CEO of The Appleton Group LLC. He earned his Accredited Investment Fiduciary (AIF) designation in 2016