While Greece burns, markets continue their hot streak . . .
As BSW clients may have noticed, we took advantage of recent strength in equity markets to rebalance portfolios. Broadly speaking, the BSW Growth Portfolio remains overweight to the US and Developing Asia, while being underweight to foreign developed markets. In terms of specific activity, recent changes included:
- Booking profits and exiting our Consumer Staples position (2011’s best performing sector, up 14%). We continue to maintain a sector overweight to Healthcare (up 6% in 2011, but still undervalued relative to the general market).
- Eliminating our Japan overweight within foreign developed and swapping proceeds back to EAFE, while still maintaining our overall EAFE underweight.
- Maintaining our Emerging Markets overweight, while continuing to focus our exposure on dividend-paying companies targeting the rising Asian middle class.
- Eliminating the managed future position within our Alternative Strategies allocation, while trimming and taking profits on our High-Yield Bond and Commodities positions.
As noted above, global equity markets are off to an exceptionally strong start in 2012. Through this past Friday (02.10.12), the S&P 500 Index is up close to 7 percent. Foreign markets have fared even better, with the European-Australia-Far East (EAFE) Index gaining 8 percent and emerging markets up 15 percent. Thus far, 2012 is a sharp contrast to 2011 in the sense that positive news is trumping negative news, instead of vice-versa. In other words, although Greece might be burning, investors are paying more attention to signs of growth in the global economy – and particularly the United States. This situation once again evidences the wisdom of the old adage, “There is the man’s side, the woman’s side, and the truth.” As such, below please find BSW’s assessment of the positives, the negatives, and the truth.
- US employment continues to improve, albeit slowly. According to the January employment report 12.8 million people are currently unemployed. Although still large by historical standards, it is the lowest unemployment level since January 2009.
- These US job market gains have boosted consumer confidence, which has in turn led to improved retail and auto sales, which has spurred business output.
- Meanwhile, the emerging economies (especially China) may achieve a “soft landing” and should continue to underpin global growth.
- The developed world (US, Europe, Japan) is massively and precipitously indebted. The strain of servicing and managing this debt is going to be a significant long-term drag on economic growth.
- Greece will, eventually, default on its debt. There is no feasible way for Greece to simply cut its way out of debt. Unfortunately, the only remedy prescribed to Greece has been additional austerity and cuts.
- The likelihood of a Greek default triggering a contagion in Italian, Spanish, and Portuguese debt will continue to have a “chilling” effect on European banks, further curtailing European economic recovery or prospect for near-term growth.
- Although 4Q11 earnings reports were rather lackluster, many investors missed this most recent rally while watching from the sidelines waiting for the “all clear to go back in the water.” As such, valuations may climb further as equity buying returns (In 2011, despite record low yields, flows into bond funds exceeded flows into stock funds by a 3 to 1 margin!).
- None of the recent US gains in housing, corporate earnings, employment, or manufacturing are particularly strong, but they are all generally moving (slowly) in the right direction. 2012 US GDP will likely be a modest 1 to 2 percent. Not great, until you consider that Europe (30% of global GDP) is in recession.
- The US Federal Reserve, the European Central Bank, and virtually all other central banks have continued to flood markets with money while also holding interest rates at or near zero. The debt assumed to fund these policies must be unwound or it risks becoming the “mother of all bubbles.”
We hope this update provides you with better insight into recent activity within your portfolio. If you would like to discuss these positions or your portfolio in greater detail, please don’t hesitate to contact BSW. As always, we are happy to help.
-David Wolf, Chief Investment Officer