If, by chance, you ignored any business media for the past ninety days, you would probably be bored by the news that the S&P 500 Index was up less than one percent in price appreciation (excluding dividends) for the first quarter of 2016. However, you would have missed one heck of a ride during the quarter! The S&P 500 began the year with an index value of 2043; it ended the quarter on 3/31/2016 at 2059, up about .8%. For those of us watching the markets daily, though, we know it fell to a low for the quarter of 1829 on 2/11/16. In rough percentage terms, the market fell 10.5% in the first half of the quarter and then rallied 12.5% from the interim low to finish with a modest gain. So, was that the stock market correction many have been calling for? Was the brief but steep sell-off that has now been erased by current gains all the pain this market has in it for investors in 2016? Can we all just relax and watch the markets climb for the remainder of 2016? As you can probably surmise, the answer is a most likely no.
The volatility of the stock market that we experienced in the first quarter is not atypical when markets are fairly valued in a slow-to-no growth economy. Stock market price changes in the short term are a combination of valuations, news events, fear, greed, etc. Many investors, particularly short-term investors, are quick to take a profit and sell in an economic environment where investments are not cheap and bad news can change low expectations to poor expectations quickly. Those of us who are long-term investors (most of the accounts at Bill Few Associates) will occasionally get whipsawed by volatility, but we are better off not overreacting to short-term swings. Instead, we should look for any new opportunities brought about by the changes in the market and rebalance our long-term investments to take advantage of them. Right now, the short answer is no significant changes. Please read below to see a summary of our Chief Strategist Tom Beilstein’s thoughts on our current asset categories:
Our allocations are just like the first quarter’s stock market: a lot is going on but little has changed. A couple of times a year, we go through our allocations with a fine-tooth comb. We study the economic conditions, stock and bond market conditions, sentiment and valuations. We do this to see if our allocations are maximizing opportunities at the proper level of risk. In March, we completed our review and will be making very few changes.
The weight of the evidence, in our eyes, has been mixed on a number of fronts for some time, which is why our portfolios have been relatively neutral when it comes to large- versus small-cap stocks, growth versus value and domestic versus international. Part of the problem has been our slow-growth recovery. If we felt the economy was going to either accelerate or fall into a recession, we would react accordingly. However, current economic conditions do not point to either scenario, causing us to remain well-diversified and relatively neutral. Some evidence is pointing toward small-caps and growth stocks but not enough for us to make changes. International stocks remain attractive on a valuation basis, but a strong dollar is a large headwind that keeps us from increasing our allocation.
On the fixed income side, we had a third party expert review our allocation. In general, their findings were positive. Our yield was above average and our duration was below average, two outcomes we desire. One finding affirmed our view that our below investment-grade exposure is higher than the indexes (markets) would suggest holding. We were aware of this, but it was brought to the forefront during the review. We plan on reducing this exposure at some point. Why not now you might ask? The answer is valuations. Below investment-grade and floating rate bonds experienced a sell-off during the second half of 2015 and in early 2016. We think this sell-off was overdone. So, although we want to reduce our exposure to these bonds, we do not want to sell at depressed prices. We are planning on giving them the opportunity to recover before making the change.
These are our current thoughts. Although there is not a great deal to act upon at this point, there are plenty of possibilities for the near future. Happy spring!
Mike Kauffelt, CFA
Chief Investment Officer
Bill Few Associates, Inc.
Data sources: Bloomberg, Ned Davis Research and The Wall Street Journal