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Posts tagged Diversification

Ever Wonder What “Really” Happens in the Markets?

By JJ Burns

February 10, 2015

The first 5 weeks of the New Year have been pretty volatile for most markets; clearly, last year’s news has brought volatility back.  Many strategists have been “pounding the table” on stocks and declaring that the Large Cap US Equity Market will continue to lead the way in 2015.  Although possible, we believe that broad diversification is still the key to long-term success.  This philosophy means we will continue to have exposure to small cap, mid cap and international securities, even though they trailed US Large Cap equities last year.  We just received an interesting piece from Louis Navellier of Navellier & Associates.  A long-time market analyst and portfolio manager, he notes:

The biggest news last week was crude oil rallying 19% from its lows in just four days, which sparked a big rally in some beaten-down energy stocks and other stocks that have been beaten down by a strong U.S. dollar. By Friday, most major market indexes had made up for all of January's declines. But here is the real conundrum the stock market now faces…of the 20 stocks that account for approximately 30% of the S&P 500's total value, too many — like Caterpillar, Chevron, Coca-Cola, DuPont, ExxonMobil, IBM, McDonalds, Microsoft, General Electric, Goldman Sachs, JPMorgan & Co, Pfizer, Procter & Gamble, and even Google have all missed analyst estimates and/or issued cautious guidance below analyst estimates… essentially what is happening is that a strong U.S. dollar is squelching sales of large multinational companies and squeezing their underlying earnings. A massive flight to more domestic stocks with real sales and earnings growth is now underway, so I expect the stock market will get increasingly narrow in the upcoming weeks.

Since the brief U.S. market correction last fall, investors have had to adjust to new information and possibly reposition portfolios with respect to:

  1. The increasing strength of the U.S. dollar
  2. A precipitous decline in crude-oil prices and gasoline, followed by a brief but sharp rally in 2015
  3. Changes in European Central Bank policy that are expected to lead to expansionary moves similar to those taken by the U.S. Federal Reserve Open Market Committee following the financial crisis.
  4. A repricing of some commodities that react to changes in inflation expectations and the dollar such as gold.

Navellier also noted that the previous time a ‘leadership change’ occurred in the U.S. markets was a mega-cap retreat in the early 2000s following the Tech Bubble.  He goes on to say:

The S&P 500 has gotten too top-heavy once again…the bottom line is that we are now unquestionably in an increasingly narrow stock picking market, and the "sweet spot" in the stock market is moving down the capitalization ladder to the mid-capitalization area.

Time will tell if this analysis is correct.  However, we agree with the thesis, and think this is a good time for rethinking exposure to international stocks as well, which might expect a boost in revenues and favorable exchange rates against the U.S. dollar.   The best news, however, is that many of our clients are in portfolios that are diversified across the U.S. market-cap spectrum (including mid- and small-cap stocks), and have international exposure as well.  We appreciate that 2014 was a trying year for many investors, but we’re pleased that we already have many of the security exposures that might prevail going forward.  For more on the markets over the last two years and how some investors fared, please see our 2014 year-end review.