The
S&P 500 posted a 1.6% loss for the month of March. The MSCI
World index was also down 1.6% while the Credit Suisse Long/Short Equity Index
finished the month with a loss of 0.4%. The S&P 500 is
slightly positive for the year with a year-to-date gain of 1.0%. The MSCI
World Index and Credit Suisse Long/Short Equity Index are up 2.3% and 1.8%
respectively year-to-date. It appears market participation is broadening a bit.
International stocks, U.S. small cap stocks, and even emerging market
names are all outperforming the S&P 500 through the end of March.
Everyone loves stocks. Fund managers (based upon Merrill Lynch’s
monthly global manager survey) maintained their global allocation to equities
is at one of the highest levels since the bull market began in 2009. Under similar
circumstances in the past, stocks have had a poor risk/reward profile over the
next several months. The market is still trading right underneath
all-time highs, so a pullback from these levels would not surprise us.
April is still the best performing Dow Jones Industrial month dating back
to 1950. The average gain for the Dow in April is 1.9%. Following
April we enter a stretch of months where historically the market can lose its
footing. Since 1950, investing in the Dow Jones Industrial Average between
November 1st and April 30th each year has generated an average return of 7.6%.
The May–through–October time period fares much worse. The average
return for the Dow Jones Industrial Average for the May 1st – October 31st time
period is just 0.3%. That’s not very good. More importantly, big
moves down tend to come in this time period, so risk management is even more
crucial during these months. That’s not to say money is never made during
these months. Some of the best months we’ve had over the last several
years came during this May-October period. But as a whole, the market
still performed better in the November – April months. We still believe
equities are in an uptrend and should be owned. We are currently
positioned 80% equities and 20% cash for all equity investors. The cash
position is reflective of the fact that large cap stocks are not leading and
there seems to be a transition away from U.S. Large Cap value names into
International Stocks and Small Caps. We reduced our position in Large
Caps several months ago seeing this trend early. These periods of
transition can often see an uptick in volatility, so a 20% position in cash
seems warranted at this time.
The
price of oil continues to grab financial headlines. Oil is currently trading
around $56 a barrel. This is up 10% since our last note. The IEA
(International Energy Agency) reported a sharp increase in OPEC's oil output in
the past month - a gain of 890 thousand barrels a day. This is one of the
largest production increases we’ve seen in the last four years. This is
likely to cause more downward pressure on the price of oil. The recent
nuclear deal between the U.S. and Iran has also raised the possibility of
seeing much more oil production hit the market - the EIA projects Iran could
increase its output by 700 thousand barrels a day by the end of next year.
Currently, Iran's oil production is around 2.7 million barrels a day. A
reduction (or outright drop) of sanctions coupled with higher Iranian output
could soften the oil market and curb the latest upward pressure on the price of
oil. Lower oil prices will continue to have an impact on corporate
earnings; particularly oil and gas companies. The long term impact of
lower or stable oil prices is generally good for the overall economy.
Consumers and corporations (ex. oil and gas companies) will both benefit.
The
Economy. The
economy added only 126,000 new jobs in March, down from 264,000 in February.
This was the first time job growth did not exceed 200,000 since February 2014,
and it was the smallest increase since 109,000 jobs were added in December
2013. As expected, the Fed is now hinting that a June rate increase might
be too soon. While we believe that a zero interest rate policy (zirp) is
not needed in the sixth year of an “expansion”, we have been on record stating
that we do not believe the Fed will raise rates this summer. It appears
that any weak data is welcomed by the Fed as another reason to wait and see.
It would not surprise us if the Fed didn’t lift rates once in 2015.
Our
Current Position. Our
current recommended asset allocation is 80% equities and 20% money market
funds. Our “target” allocation for equity investors is 20% Real Estate,
20% Large-Cap Growth, 20% Mid-Cap Growth, 20% Small-Cap Growth and 20% Cash.
From a global allocation perspective, we are positioned 100% U.S.
Domestic equities. From a capitalization perspective, we are positioned
with 40% Large-Caps, 20% Mid-Caps, 20% Small-Caps, and 20% Cash. For
fixed income investors, we continue to hold core positions in total return bond
funds in all accounts along with municipal debt in taxable accounts at this
time. We also tactically own shares of a high yield municipal bond fund
for our fixed income investors. Should our strategy show any changes we
will act accordingly. We continue to follow our disciplined investing
approach and will not hesitate to make changes to investment allocations should
our strategy dictate.
