Markets around the world, especially in the Eurozone, sold off this week following the warning by the IMF that there was a chance that the Eurozone economies could slide into its third recession since the financial crisis.
U.S. stock markets declined in sympathy with other world markets, but at least for now, the longer-term trend seems to continue to be higher. The U.S. economy has also been steadily improving, in contrast to some weakness overseas. The U.S. large-cap stock market as represented by the S&P 500, has not had a correction of 10% or more for the last two and a half years, while historically such a decline has happened approximately once every 12 months. This has led many market commentators to have a more negative short-term outlook, even as stock prices have moved higher. The S&P 500 Index is within 3% of its all-time high and is up 6% for the year to date.
Corrections in the market can occur at any time from any level, but it is impossible to predict the timing. In the short-term, market moves are largely based on emotional reactions, while fundamentals, particularly earnings growth, drive individual stock prices over the longer-term. The market averages get the headlines, but we do not buy the indices. Our stock positions are long-term commitments as owners, not renters or traders.
We live in a turbulent world with many concerns that can affect global markets – there is the possibility of Europe falling back into a recession, expected changes in Fed policy and rising interest rates, slowing growth in China, geopolitical concerns in the Middle East and the Ukraine and elsewhere throughout the world. Growing economies usually do not die of old age; they are killed by policy mistakes or by some outside shock. There will be periodic disconnects between market prices and fundamentals, as well as unexpected changes in the economy, which could be positive, as well as negative. For the most part valuations in the markets in which we are invested are not at extreme levels, monetary policy is accommodative, inflation and interest rates are low, and we believe it would take the unlikely prospect of a recession, to lead U.S. markets into a serious decline.
Whitnell investment portfolios for clients are constructed on a strategic basis in line with our economic and monetary perspectives and valuations for asset classes and individual securities to achieve client long-term objectives. Individual investment positions and asset class allocations are reviewed on an ongoing basis to reflect changes in prospects and valuation levels.
It is our considered judgment that the bull market that has been in place since early 2009 is still intact. In the current market environment we continue to maintain an over-weighted position in quality U.S. large-cap equities that have durable competitive positions, and in real assets that are reasonably valued. This is a necessary and appropriate portfolio policy for most clients in the current low interest rate environment at a time when risk premiums on many other asset classes remain compressed.
There is much debate in investment circles about the role of fixed income securities for investors in today’s environment. With the current level of interest rates, income returns are historically low for bonds of all classes and maturities and prices are subject to price risk when interest rates eventually rise. As a result, fixed income securities may no longer provide the traditional role of investment income and safety of principal to offset the volatility of stock prices.
The Federal Reserve has announced that this month it will end its unconventional program of buying U.S. treasury and mortgage-backed securities. This will conclude the quantitative easing program that has been undertaken since the 2008 recession. The prospects for the U.S. economy look more favorable than for most of the rest of the world with the result that the dollar has continued to be strong relative to other currencies.
Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission.