Since the elections back in early November, two market-related events stand out: First, practically every at-risk asset in the marketplace (such as domestic and foreign equities, real estate, commodities, etc.) has demonstrated a strengthening, rising price trend. Second, the fuel for this advancing market has come at the expense of most fixed-income assets (particularly federal government bonds and municipals). This is ideal.
Both outcomes are easily understood in the context of the Repbulican victory in the House of Representatives. Equities, real estate, and commodities tend to do well in an environment of a business friendly regime – exactly what the economy had been missing over the past two years. And the declining values of fixed income assets is largely attributable to investors selling their bonds and cash (which pushes prices down and yields up – simple supply and demand) to invest in more productive areas of the market. This investment environment, if sustainable, is a perfect example of a market with increasing momentum, and increasing prices for all growth segments of the market.
The combined activity of the tens of millions of market participants who actively buy and sell all of the assets mentioned above cannot (and should not) be ignored. After all, it is this collective activity that moves the markets, creates trends, and ultimately helps set the true value of practically every economic asset. No one individual (Warren Buffet, John Bogle of Vanguard fame or little old me) is smarter than the markets. What I think doesn’t matter, because the market can (and often does) move in sustained directions that can be difficult to forecast. The current market is a prime example.
By all accounts, the markets should not be doing as well as they are. Unemployment is still uncomfortably high, several significant European countries are teetering on the brink of insolvency, and the banking sector is still fragile. All of that bad news is already priced in – it as been for over a year now – and the rising price trends reflect real economic progress.
But don’t ignore the big picture: the S&P 500 still has to go up by approximately 25% just to get back to where it was A DECADE AGO. And the NASDAQ is still more than 80% away from where it was in March of 2000!
The Appleton Group Portfolios
Barring anything unexpected, most of our core managed portfolios will end the year in positive territory, but behind the overall markets. This is due to our deliberate decision to reduce our exposure to the markets during the turbulent summer months, and having missed out on the market’s rapid return to positive territory. The one standout portfolio is our flagship Appleton Group Portfolio, which is tracking the markets nearly step-for-step.
It has been our intention to participate as much as possible in predictable, sustainable rising trends, which we are in right now. The summer months were anything but, with Ireland, Greece, and France all witnessing violent demonstrations over severe budget cuts. Every significant market downturn starts out exactly the same way – with short-term trend lines crossing long-term trend lines. The depth of the ensuing market declines is impossible to predict, but 2008, 2002, 2001, and 2000 are all recent evidence that markets don’t always cooperate with our schedule.
At present, we are fully invested in all growth segments of the markets that we use in our managed portfolios: domestic value and growth equities, foreign emerging markets, U.S. real estate, commodity-based equities, and high yield bonds. These positions have helped us put in a solid advance this quarter. Our bear-market assets which we chose to own over the summer months have proved unnecessary to maintain, and as such they currently do not exist in any of our portfolios.
Briefly, the end-of-year holiday season is now upon us, which means that most market-moving data will be nonexistent. We don’t expect to have any portfolio adjustments between now and the New Year. January will mark the Republican takeover of the House of Representatives to be official. So far, so good.