Clients and Friends of our Firm:
Time to Sell
It’s time to sell… not indiscriminately, and certainly not in a panic, but it is time to selectively reduce risk by taking profits in securities for which we cannot make a rock-solid case. Here’s what we see; in Spring of 2009, the markets began to recover from the Financial Crisis of 2007-‘08. Since that point, we have had six consecutive years of market gains. A further gain this year, 2015, would represent a seventh year. The last time that happened? Never according to multiple sources (1). There is some debate as to the accuracy of that claim depending on how it is measured (see footnote below), but I don’t want the minutia of the measurement data to distract us from the larger message that our current Bull market is getting long in the tooth. While I am uncertain as to exactly when the Bull Market’s clock will strike midnight, I am convinced the hour is getting late. We see expectations for further gains in 2015 largely based on hope rather than on compelling value, and we believe hope is a poor investment strategy. Thus, we are adopting a more vigilant stance.
Here’s Our Plan
Over the course of the next few weeks / months, we will be selectively selling assets, raising cash levels, hedging positions where possible, and adding low volatility securities. For IRAs, 401(k)s, and other tax-deferred accounts in which there is no capital gain impact of taking profits, this task is more clear-cut. For normal taxable accounts the task is more difficult as we weigh the merits of taking profits that generate a tax bill for our clients. We may choose to hedge these accounts in ways other than selling outright. It will be an account-by-account exercise. This note is intended to give you the general direction of our intentions.
Are we Bearish on the Market?
Actually, no. As long as interest rates remain near historically low levels, we believe that investors will continue to buy the dips, as has been the case for the past six years will unfaltering regularity. We will still be looking to buy selectively in securities at prices we consider to be bargains. However, with valuations slightly elevated versus historical norms, the market trading at all-time highs, and the aforementioned note that a market gain in 2015 would make a seventh consecutive year, our over-arching goal at this point is to reduce risk. If we see a significant market correction in the next few weeks or months that brings valuations down to what we would consider compelling levels, we may change our stance. But for now, we believe the risk / reward needle is currently slanted towards the risk side.
Summary: A Near Term Reduction in Risk
Our responsibility to our clients is to not only make you money in good times, but to do our best to protect you when we believe the potential risks outweigh the rewards. We may be too early on this call, or just wrong. If that is the case your risk will be limited to missing some upside in the short term. We don’t expect to maintain this posture indefinitely. Again, this is a general indication of direction. We are happy to discuss the potential impact on your account(s) specifically.
Jonathan Boyd
Direct: (843) 837-2535
Note:
(1) Business Insider, Forbes, CNBC.com, and the Street.com all ran recent articles stating the market has not been up seven consecutive years. See links for recent articles: http://www.businessinsider.com/stocks-close-up-2015-something-never-happened-before-2015-1, http://www.cnbc.com/id/102372804, http://www.thestreet.com/story/13038479/1/can-stocks-defy-history-by-climbing-seven-years-in-a-row.html. Looking deeper, it appears this widely reported “fact” may be inaccurate. If interested, see the following two links: http://www.businessinsider.com/tom-lee-stocks-have-risen-for-6-or-more-years-2015-1,http://www.wallstreetrant.com/2015/01/doubleline-data-fail-stock-market-has.html.