This week I took a few days off to spend time in Las Vegas with my wife on a mini vacation to unwind from our hectic schedules. The short time away allowed us to decompress from long work days, raising two kids (plus a chocolate lab), and keeping the house in one piece.
I will say that I was astounded by the economic activity in Sin City at the height of the summer heat wave. The prices of everything seemed to be at all-time highs, while the hotels and casinos were packed full of travelers from every corner of the globe. Everyone seemed to have money to burn and were happy to part with it for a few hours of dining, gambling, or entertainment.
I was also reminded that I’m a far better investor than gambler, which is why I’m going to stick to my day job. I stayed in my lane at the craps table and was rewarded with just a small net loss. I was happy to walk away with the majority of my capital intact rather than having to endure a painful lesson in risk management.
Stepping away from the market for a few days allowed me to examine where we are in the current cycle as well as evaluate how we got here. Here are some of my thoughts on where we stand:
- Trends and correlations are becoming more difficult to discern this year. Everyone is trying to determine if this is the beginning of the end in stocks or a brief respite before a renewed push higher. The sideways grind has created a great deal of frustration and performance anxiety among individual investors that have become accustomed to easy gains. I would bet that the path of greatest pain is probably higher as the recent volatility has probably created greater allocations in cash and/or hedges to reduce the risk of a drawdown.
- The market has been incredibly resilient this year when you look at the “wall of worry” that stocks have had to climb. The debt crisis in Greece, stock crash in China, currency volatility, and global commodity deflation are just some of the headlines that we experience on a daily basis. While these have created some minor bumps along the way, being 2-3% from all-time highs is still something to celebrate.
- The 2% gain in the SPDR S&P 500 ETF (SPY) doesn’t even tell half the story. Energy stocks are down 11%, while health care and consumer discretionary companies are sitting on 10% gains. This bifurcation between individual companies and sectors has created a tug-of-war in diversified ETFs and mutual funds. This type of environment is when it becomes obvious how much index construction and positioning plays a role in your total return.
- This bifurcation isn’t isolated to the stock market either – bonds are experiencing a similar divergence. High yield bonds are trading near their lowest levels of the year as fixed-income investors shun credit risk. Conversely, we are seeing a flight to quality in Treasury, investment grade corporate, and quality mortgage bonds despite the consensus that we are going to experience a Federal Reserve rate hike in the near future. It will be interesting to see how this sentiment plays out over the remainder of 2015.
The Bottom Line
No one knows what the next big move in the market will be, but sticking with your plan rather than getting anxious and being overly predictive will likely serve you well. I have been focusing on making modest changes to our client portfolios in order to take advantage of new opportunities or trim risk where needed. Being flexible to multiple outcomes and having the ability to shift your asset allocation will be central to a successful outcome through the remainder of 2015.