The holidays are here and along with them come the annual market pundits with their predictions for next year. While we don’t believe in predicting markets, we do believe in reviewing the most recent quarter and assessing the current environment to understand where are now so we can manage risk appropriately; just like making a new year resolution. So let’s take a look at last quarter, our current state and where the risks live in the markets:
Summary, Last Qtr: In Q4 the Federal Reserve backed away from tightening and instead chose to extend quantitative easing (QE), which the markets saw as a little bit of a surprise. That helped stabilize interest rates (for now) and is generally good for equity markets, although most market participants are anticipating the end of QE, which leads to uncertainty. The political environment remains uncertain both internationally, with China flexing military muscle, and domestically with the botched rollout of the national health care plan. Thus while the interest rate environment remains healthy for equities to rally, the political risks are high, resulting in the appearance of a range bound growth environment amid policy uncertainty.
Our Commentary: We continue to see fixed income as an area to reduce exposure. Interest rates are expected to continue to rise, which would decrease the value of bonds, especially longer term bonds. US equities continue to lead, especially the small to middle sized growth companies, and we believe that will continue for the near future with international equities also an area for positive developments. For investors that can tolerate the additional equity exposure, consider increasing equity exposure and reducing bonds or at least shorteneing the duration of your bond exposure. For investors that do not want to take on the additional risk, short term bonds or a stable value fund can be a replacement of long bond exposure.
Our Investment Committee periodically monitors the markets and will continue to provide comments at the beginning of each quarter. Each portfolio is different and we recommend getting individual help, which we are happy to provide.
Happy Holidays to all; we will check back in the Spring!.
International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods. Past performance cannot guarantee future results.
Fixed income securities carry interest rate risk. Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
Opinions voiced are not intended to provide specific advice and should not be construed as recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial professional.