Uncertainty Stalls Markets

Labor Day marks the end of summer and while September can be slow, often there are new opportunities in the financial markets as the end of the year is in sight.  There is seasonality to the markets and stocks historically make slow or little progress in the summer months.  For the last three years, summers have been dangerously volatile.  In the summer of 2010 the S&P 500 dropped -17%, in the summer of 2011 it dropped -21% and from April to early June in 2012 it dropped -10%.  Most investors are unwilling to accept losses of this magnitude in their portfolios, even in the short term.

We are not predictors of the market, because it is impossible to predict with accuracy and predictions cloud decision-making.  We interpret the market as it plays out, and we make adjustments in our portfolios as necessary to preserve capital and grow the portfolio.  If you preserve capital, you have money to invest another day.  In the volatile market we have experienced for the past four years, gains are usually made in a few short months.  Little progress can be made in times of extreme volatility and it is important to protect capital because large losses can destroy a portfolio.

This year we experienced a brief rally which began at the end of December 2011 and lasted through March 2012.  The market was in an uptrend that started gradually and strengthened into the spring.   But, in April stocks began selling off sharply as institutional investors dumped shares on first quarter earnings reports and lower profit forecasts.  Since then there has been a series of extreme ups and downs with little progress.  In our portfolios during this time we emphasized indexes to eliminate company risk and raised our cash positions to protect capital.  We also added bonds for stability and yield.

By the end of July the market began another uptrend although in weak volume.  This lack of participation was not unusual for the summer months.  The market continues this uptrend, but it is very news sensitive and there is plenty of news to discourage investors.  The continual struggle in Europe impacts our markets as investors show concern over the future of our largest trading partner, Western Europe.  News last week that the ECB plans to start a new bond buying program to preserve the Euro is credited with the strong rally in our stock market immediately after the announcement.  Domestically investors worry about jobs, home prices, the fiscal cliff, taxmageddon, and sequestration.  Uncertainty kills markets.  Until investors have some certainty around these issues, they will hold cash.  Cash is an asset class and it is important in volatile uncertain times.

As the market improved in August, we increased equity exposure.  We have noted that there is a lack of the defensive names among the leading sectors this time around.  Strong sectors include real estate, medical/biomed and high-end retail stores.  As we see new leadership emerging, we are monitoring a watch list of strong stocks and watching closely for opportunities for growth.  If the market continues this uptrend we will continue to add to equity positions.  And as we approach the 4th quarter, hopefully there will be a resolution to some of the uncertainty that has stalled the market.  The election is expected to be close and resolving that unknown will give direction to investors, as will decisions about tax rates and the debt limit.

This report is a publication of Guelich Capital Management LLC, a registered investment advisor.  Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.  All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.