Thursday, April 15, 2010

One Sneeze, Two Sneeze, Third Time You are Out?

Here's the score for the past year since 4/21/09:
  • S&P 500 (SPY) up 42%
  • Emerging Markets (EEM) up 57%
  • Emerging Europe (GUR) up 81%
Virtually, all global economies have recovered since the trough of the recession early last year, but that recovery has been uneven and is likely to remain that way. Emerging markets have emerged first and the U.S. is ahead of the European developed markets in its recovery.

I expect the unevenness in returns to continue and likely result in greater volatility vs. the "straight to the top" rise of world stock markets this past year. Passive, broad-based asset allocation strategies utilized by the many advisors and investors may not be well positioned to capture the new opportunities and more importantly, avoid catastrophic declines after such a run up in stock prices.

Sneezes vs. The Flu
The world sneezed once with Dubai's credit problems, twice with Greece's credit problem, both times with world stock markets barely breaking stride. It is only a matter of time when one of these sneezes turns into a worldwide "easy credit flu." You do not want to be overly allocated to stocks when the last straw breaks the camel's back.

Oddity (Not Really)
The asset class (as measured by the S&P 500 index) the "crowd" is most bullish on currently is the one that has:

  1. Lost money over the past 10 years.
  2. Has gone up 42% over the past year.
Action Plan
Investors should retain advisors who can adjust their allocations to reflect the increased sovereign risk of certain countries. At the same time, investors and advisors should embrace the decreased risk from investing in high quality, dividend paying companies, many of which are now awash with liquidity.

Portfolios should also be positioned to defend against the potential weakening of certain currencies and use commodity exposure (via Managed Futures) along with dynamic asset allocation as a way to protect against the possibility of inflation and other market risks.


Only by standing against the prevailing winds–selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising based upon the momentum of the herd vs. fundamental valuations.

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