Navigating the Waiting Game

md investment services

Navigating the Waiting Game

What a difference a new year makes. Just when investors might have been lulled into the notion that a low-volatility and upward-trending environment was here to stay, the stock market shifted gears in early 2018, jolting participants back to reality.

By the end of May, the S&P 500 produced a total return of 2% for the year, a fairly anemic number compared to the 8% we saw by the end of May last year. Lest we think we’ve been experiencing a sleeping market, we’re reminded of the volatility that greeted us right out of the gate: The S&P 500 with dividends gained over 5% in January but fell over 3% in February and another 2.5% in March, leaving investors right back at square one by the end of the first quarter.

As we’ve mentioned in previous market updates, the S&P 500 has been trading in a range between the high reached in late January and the low we saw in early February. That correction represented a 10% drop, the largest we had seen in quite a while, leaving investors to wonder whether it was the beginning of a deeper slide.  Although stocks recovered somewhat in April, they have remained within the confines of that January-to-February range, albeit not without periods of increased volatility.

Until the stock market breaks out of that range, we wait. For what, you might ask? A break above the January high would be perceived as a bullish sign, in which case we would add to our equity exposure. However, a break below the February low would be considered a bearish move, and we would raise cash levels. As of the end of May, our portfolios were positioned somewhere in the middle, ready to take advantage of either scenario:

While we wait for the broader stock market to confirm a bullish or bearish stance, we keep an eye out for opportunities in pockets of strength beneath the surface. Two such areas that have been stronger than the broad market since March are small cap stocks and commodities, and we have exposure to both in several strategies. Small caps were particularly strong in the month of May, helped by a solid U.S. economy and a move away from multinational companies facing geopolitical concerns.

Growth stocks, most notably in the technology sector, have also been favored over value stocks this year, and our equity-oriented portfolios continue to maintain a growth bias.

What about the bond market? Looking for pockets of strength also holds true on the fixed income side. While the broader U.S. bond market has been struggling, down 1.5% for the year through the end of May, our conservative strategies maintain exposure to areas that have been holding up better. These areas include floating rate, high yield, and municipal bond funds.

Even though markets may stay range-bound, broadly speaking, there are usually smaller segments within those markets that reflect better relative strength and provide opportunities for active investing. Navigating the waiting game can be better spent identifying those pockets of relative outperformance.

Mary Ann Drucker
Assistant Portfolio Manager

 

 

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Financial Services Advisory, or any non-investment related content, made reference to directly or indirectly in this newsletter) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions or applicable laws, the content may no longer be reflective of current opinions or positions.

The FSA Safety Net® is designed to represent an exit point for each security within a portfolio and to help reduce losses from sustained drops in the financial markets. The FSA Safety Net® is not effective and will not protect assets in abrupt/sudden market drops. Examples of such occurrences include, but are not limited to, the market crash of October 1987, the market drop in October 1989, the market disruption caused by the terrorist attacks of September 2001, and the flash crash of May 2010. Similar future occurrences could reduce the effectiveness of the FSA Safety Net®.  In addition, the FSA Safety Net® will not protect assets in the event mutual fund companies, custodial companies, or the securities exchanges themselves, at their discretion, suspend, disallow, or fail to conduct trades, redemptions, or liquidations.

Inverse/Enhanced investments: FSA may utilize inverse (short) mutual funds and/or exchange-traded investments/funds (ETFs) that are designed to perform in an inverse (opposite) relationship to certain market indices (at a rate of one or more times the inverse result of the corresponding index). In addition, FSA may also use leveraged (enhanced) mutual funds or ETFs that provide an enhanced relationship to certain market indices (at a rate of more than one times the actual result of the corresponding index). There can be no assurance that any such investment will prove profitable or successful.  In light of these enhanced risks/rewards, clients may direct FSA, in writing, not to employ any or all such investments.

Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from FSA.

Financial Services Advisory is neither a law firm, accounting firm nor insurance agency and no portion of this newsletter should be construed as legal, tax, insurance or accounting advice.  FSA advisors are not attorneys, accountants, insurance agents or comprehensive financial planners and no portion of its services should be construed as legal, accounting, insurance, or tax advice.

For further details, including FSA’s current Disclosure Brochure discussing our advisory services and fees, please see important disclosures at www.FSAinvest.com/disclosure. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement.

Please remember that it remains your responsibility to advise FSA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

About Author

Related posts