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Second Quarter Newsletter - Every four years

Second Quarter Newsletter - Every four years

Every four years the Summer Olympics rolls around and it’s hard to believe that the Summer Games are upon us once again. It seems like just yesterday when Michael Phelps won a record eight gold medals in a single Olympics in Beijing. No matter what the storyline is heading into the Olympic Games, I can't help but stay glued to the television and watch the athletes awe us with their extraordinary feats of athleticism, agility, speed, and calculated recklessness. When the events are over and the winners are awarded their medals, it's just astounding to think that out of thousands of athletes that compete in these sports, the ones who end up on the medal podium are the best in the world, or as we like to say, "world class".

It was 2008 the last time we had the opportunity to watch these athletes compete on such a grand scale, but the athletes that make it to these games are not chosen at random or for their perceived potential. They must earn their trip to London by performing well in trials. Much like these Olympic athletes, stocks too compete for the right to be chosen into your portfolio. Think about it for a second. Out of the thousands of stocks that are traded throughout the global exchanges, all of these stocks have to compete against each other on a day to day basis. Olympians are chosen to represent his or her country based on quantifiable metrics i.e. time, distance, points. Those that rank the best are rewarded with a spot on the Olympic team. So when one has to determine which stock, sector, or asset class is worthy of that coveted spot on an Olympic team -- meaning a place in your portfolio, it's best to start by putting each stock through its own Olympic competition.

One quantifiable metric that has a tried and true history of providing an objective measure of performance is price. Every day stocks compete in the market and every day the result of these competitions are recorded. By recording the results of this daily competition we can rank stocks, sectors, and even asset classes in order to objectively see which areas of the market are performing the best, in addition to seeing which stocks areas are performing the worst. As a result of these it provides the ability to select holdings in a portfolio that have earned their way in the same manner that Olympic athletes must earn their ticket to the Olympic Games.

The past few years have been a trying time in the market as the market has been wrought with volatility, and the feeling of “Summertime Blues” hasn’t been truer. 2012 started off on a positive note for the market; however, from April to June the market experienced a 10% pullback. Going back to the origination of the S&P 500 in 1928, this stock market index has experienced an average of one 10% pullback per year. Only about a quarter of the time do pullbacks like this lead to “bear markets”, which is commonly defined as a 20% market correction (Research compiled by Dorsey, Wright & Associates, LLC, utilizing data provided by Thomas Reuters). We don’t know when one of these bear markets is going to rear its ugly head, but having the flexibility to become more defensive is important to mitigate the volatility, and ultimately protect your money. The same tools that are used to select stocks in your portfolio are used to select more defensive positions. With that said here are some of the leadership themes that are shaping up in the market as we move through the summer months.

  • The stock market continues to present some opportunities. As it stands today roughly half of all stocks are showing overall positive trends in this market. The other side of this means that the other half are in negative trends. Therefore, stock selection is likely going to continue to be important.
  • In addition to stock selection, asset class selection remains important. Often times it is not what you own that makes the difference, but what you do not own. If there has been one consistent theme it has been the weakness from International markets. For instance, the MSCI EAFE Index is down more than 20% over the past 12 months (period beginning 7/25/2011 and ending 7/25/2012). There is no doubt the worries over the Euro, Greece, and Spain have all led to increased volatility in the overseas market. Out of six major asset classes (Domestic Equities, Fixed Income, Foreign Currency, Commodities, International Equities and Cash), International Equities continues to rank in the bottom half at position number 4, and thus is an asset class that will continue to receive an underweighted position in the portfolio until it is able to demonstrate leadership qualities.
  • At the end of the day, a lot of the trends that have unfolded in the market over the past year and have come during a time period in which the US Dollar Index has actually been strong, posing a gain of 14% in the last year. Typically, during periods in which the US Dollar is strong, International Equities and Commodities, tend to come under more pressure and this is exactly what we have seen recently. At the same time, fixed income investments and select areas of the US stock market tend to do better during periods of time when the US Dollar is performing well.

If you have any questions regarding portfolio strategies during periods like this feel free to contact me and I would be happy to discuss them in further detail with you. In the meantime, kick back, relax and enjoy the rest of the summer.

Thank you for your business and support,

Jeff Bowers, CFP

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