Today equity markets tumbled the most in a year on concerns that the European debt crisis will spread, threatening the global economic recovery.  At one point, the Dow Jones Industrial Average was down nearly 1,000 points before recovering to close down 348 points, or 3.2%.  News reports suggest that a trading error in S&P futures sparked the dramatic plunge, along with temporarily outrageous price declines for some stocks.

While the specific cause is unknown and currently under investigation, keep this point in mind: prior to the mid-afternoon plunge and subsequent recovery, the Dow was already down 400 points.  The S&P 500, which closed at 1128, had blown through good support at the 1150 level.  Safe havens, such as gold, U.S. Treasuries, and the Dollar, soared. Investors were clearly selling risky assets, and the supposed trade error only made the selling more dramatic.

Fear has suddenly returned to the markets, and investor confidence in the recovery will be tested in coming days.  Given our concerns about investor complacency, lofty stock valuations, and the potential for Greek debt contagion, Kanaly’s portfolios are positioned for this environment.  The following summarizes our current portfolio positioning:

  • Equity exposure is less than 30% following yesterday’s reduction in our international exposure.
  • We continue our bullish stance on the U.S. Dollar (holding the PowerShares US Dollar Index) as we expect the Euro to continue to depreciate.
  • Gold, which rose $31 to $1206 per ounce today, remains a core holding.
  • High quality fixed income, both municipal and investment grade corporates, makes up 30% of our allocation.
  • Liquid alternative investments and cash, at nearly 40% of our model, have provided good downside protection during this week’s equity market swoon.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.