The US stock market has put in a nice run since October 2011. But, most of the gains, undeniably, have come along in a period where the global economic backdrop has been quite ominous (and continues to be). Since this past autumn, we have seen (are seeing):
- November 30, 2011 – Western central banks flood the global economy with US dollars. This action was a result of European banks hitting epic needs for US dollars since they will not loan to one another. They continue to not loan to one another today.
- 1 trillion Euros in short-term loans to continue bailing out European banks
- Oil prices start a march upward that continues today
- Significant tensions in the Middle East ramp up with Iran and Syria adding pressure to the potential economic destabilizing effect of rising oil prices
- Greece defaults on it sovereign debt.
In the midst of this heightened global market tension, I have chosen to hold stock exposure steady. I did add a small measure of stocks to many portfolios in January but, since then I thought it prudent to see firmer economic ground before committing more to stocks. Some of that short-term, firmer ground may be appearing now and has pushed the market up some. In my mind, prudent risk management is more important in this environment than chasing a stock market fueled by market-distorting, dangerous monetary policies of artificially low interest rates, European nation bailouts and global money printing. In the medium to long-term (18 months and beyond) the outlook for the market is dangerous. In the short-term (less than 18 months) we could see more positive stock movements barring an escalation with Iran. I stand ready to make more stock investments at lower levels should the firmer ground continue. At this point, the market is in overbought territory from many reliable indicators. Consider:
- 75% of stocks trading on the New York Stock Exchange (NYSE) are trading in a positive fashion. To frame the reference here, the most recent high was 85% back in 2009 after the snap back from the lows of March 2009. To add even more color, the high in this area in 2007 (pre-market collapse) was 75%. Consider now the global economy is in worse shape with US housing weak, unemployment high and many other global risks.
- 84% of stocks in the S&P 500 are above their 200-day moving average. To frame this reference, consider that in 2009 after the snap back from the market lows, this indicator hit 92%.
The bottom line here is that while the stock market is moving up, my clients are participating all-the-while having purchasing power protection with exposure to precious metals. The metals are volatile and at points are a wind at the back of portfolios, and at times a headwind. We have to take the good with the bad in regard to the metals until such time as the social, political and economic environment changes. In any case, the reason to own metals still strongly exists with negative real interest rates, bank bailouts and money printing continuing for the foreseeable future. I do also have some select areas of bond exposure in portfolios for some downside protection as the market, since 2009, has been prone to sudden downdrafts like we saw this past August.
Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions? Call me to schedule a free review of your current investment portfolio – 913.402.6099.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.