We will be holding our quarterly investment strategy webinar next Thursday, but let me provide a few thoughts on the difficult start to the new year for risk assets.
Through Wednesday, the S&P 500 is down 9% so far in January, and most major equity indexes are trading below the lows reached in August 2015. The economic slowdown in China, the collapse in oil prices, and the Federal Reserve’s plan to raise interest rates are the main factors behind the selling. This week, the decline in stock prices seems directly correlated with new lows in the price of oil, as investors are beginning to price in a global recession.
We believe that fears of an upcoming recession are overdone. Recent economic data in the U.S., particularly employment and housing data, point to modest growth. Industrial businesses have been significantly hurt by the collapse in oil prices, but consumers drive 70% of U.S. economic activity. So for the moment we expect slow growth, not a recession. This is important because the worst equity market declines occur around a recession.
How does this impact investment strategy? We have constructed portfolios to provide some protection for downside equity market volatility. Our positions in high quality fixed income securities and alternative investments with low correlation to stocks are providing good diversification benefits. In addition, last summer we reduced our positions in small cap and emerging market equities, two areas that have been hardest hit in this selloff. And we entered the new year with a higher than normal cash position.
In short, we believe this is not a time to panic. Our asset allocation strategy has provided some downside protection, and we have cash available to take advantage of opportunities that emerge once the markets stabilize.
We look forward to discussing investment strategy in more detail in our upcoming webinar on January 28th at 10:00 CST.
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.
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. 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.