Showing posts with label Stocks. Show all posts
Showing posts with label Stocks. Show all posts

Friday, April 22, 2016

Time to Lighten Up on U.S. Stocks?

As those of you who follow my financial blogs know, I am a believer that the largest component of long-term investing results is one’s asset allocation. To maintain a proper allocation, one must periodically rebalance portfolios.

Since the beginning of the year, the S&P 500 has risen about 3.9%, which does not seem like a huge change. However, the year started off with a sizeable correction, so from its low this year, the S&P 500 is up over 14%.

And since it’s low in 2009, the S&P 500 is up over 200%, demonstrating why bailing on stocks when all seems gloomiest is exactly the wrong approach. And, I would argue, so is going all in on stocks as the markets continue to appear rosy. (That would be now.) Rebalancing forces one to sell off relative winners to buy relative losers.

If you haven’t rebalanced in a few months, it might be a good time to determine if your portfolio needs attention.

Only rarely do I change the allocation percentages of my various investment categories. Now, however, is one of those times. My sense is that U.S. stock markets are overpriced. As noted, The S&P 500 has already risen over 200% in the last seven years. That’s past. What matters is the future, and current price has everything to do with collective future expectations.

My expectations are a bit gloomy:

The bull market is already seven years old, but still propped up by expansive fiscal and monetary policy. The Fed still keeps interest rates artificially low. The U.S. Federal government stills pumps money into the economy. Its projected deficit for the year is $500 billion. Continually applied, these types of polices lead to bubbles.

Interest rates are much more likely to rise than decline (a negative to both stocks and bonds), unless a recession occurs.

Commodity prices have fallen substantially, temporarily boosting profits (consider airlines, for example). The five-year decline is likely to reverse.

The dollar has risen substantially over the last five years compared to major currencies (Euro and Yen by 30+%). This means U.S. based exports are more expensive and foreign earnings for U.S. companies have less value.

Much of the U.S. unemployment slack has been erased. This means corporations will have to pay more for talent they need. At the same time, much of the increased profit margin they have wrung out of labor costs by converting full-time positions into part-time and on call employees, outsourcing, and eliminating defined benefit pension plans and the like has already been fully reflected in earnings.

When (not if) the next recession occurs, the Fed will have fewer resources to counteract the liquidity crises that will surely occur because it has kept interest rates artificially low. Similarly, with the U.S. debt at record levels, Congress will be unlikely to approve appropriate economic relief measures.

Thus, the next recession will likely last longer and be deeper than would be the case if the U.S. economy were not starting from a position where expansionary measures are constantly in effect.
All of which says to me that U.S. stocks are riskier than usual in my portfolio. Recall that I am older and retired, which means I have fewer years to recover from any bear market and (worse) I do not have the ability to purchase more investments through savings from future earnings.

So my situation is different from yours, as may be my analysis of what to expect. But I figured I’d share my thinking and maybe learn something from everyone’s reactions.


~ Jim

Monday, May 31, 2010

Ignoring the Daily Market Report

You’ve heard the same dribble I have on the daily market report. The announcer breathlessly says something like, “The Dow surged higher today on news that same store sales increased one-tenth of one percent in the first quarter.”

Three weeks later the compiler of the statistic posts a correction and it turns out the minimal increase was in fact a decrease of one percent. No mention is made in the commentator’s daily report on the day of the change because the markets rose that day and the poor guy needs to find some reason “there were more buyers than sellers.”

Let’s tackle that one first. For every share someone wanted to buy, someone else wanted to sell. If at a given price more people would like to buy than sell, the price moves up until either potential buyers drop out (because it is now too expensive) or more sellers show up because of the higher price. This leads to the classic supply/demand curve:
As demand for the shares increases from Q1 to Q2, the price increases from P1 to P2, shifting the demand curve upwards from D1 to D2. Prices could also increase when supply decreases while demand remains constant. When stock prices fall it is either because demand decreased or supply increased.

The other thing to keep in mind is that 50% to 70% of the trading in stocks today is between two computers. Computers make decisions based on complicated algorithms designed by their masters. While it is possible the one-tenth of one percent same store sales increase is a component in an algorithm here or there, my guess is it’s not a big driver and certainly not the only one.

Assume the government releases the statistic at 9:00 am. By the time the markets open the algorithms have already reflected the new statistic, meaning the computer already knows whether it wants to buy or sell at the opening bell and at what price. What’s happening the rest of the day? At best the release of the statistic is like a stone tossed into a pond that generates a few ripples. After that, clear water. It certainly is not the driver of all purchases and sales.

At the end of the day the markets went up or went down. Unless the change has caused your portfolio to become unbalanced, do yourself a favor and ignore the market pundit.

~ Jim

Monday, May 24, 2010

Buy Low, Sell High

Well sure, everyone wants to buy low and sell high. The question is how to know what’s high and what’s low. If you are expecting an answer to that question, you will be disappointed, but I do have a technique that has worked well for me over the years.

I rebalance my portfolio whenever it needs it. Each month I develop a balance sheet and I check to see how far out of whack my actual investment allocation is relative to my “ideal.” If there is a large enough difference, I sell whatever I have too much of and buy whatever I need more of.

How do imbalances occur? Either an asset class has risen more than others (not a bad problem to have), or has fallen more than others. Sometimes one asset class rises while another falls. However it happens, when a significant imbalance occurs, I rebalance by selling the one that has made relatively more money (which is selling high, more or less) and buying the laggard (buying low.)

I try to keep as much of my balancing in my tax-deferred accounts to avoid immediate capital gains taxes. I also hold down fees and expenses by utilizing mutual funds (mostly index funds) rather than individual stocks. On Wednesday I’ll explain my preference for mutual funds over individual stocks.

~ Jim