How to determine the proper time horizon to evaluate portfolio performance is always a subject for an interesting conversation. In a recent client survey on investment issues, we asked our clients “What time horizon do you feel is the best time frame to evaluate portfolio returns?” The results varied: 16% said “Monthly,” 43% said “Quarterly,” 37% said “Annually,” and 4% said “Over a complete market cycle.” (As an investment professional, I would have selected the last option.)
Every now and then I scan various Exchange Traded Fund (ETF) options to find out what is working to determine if new trends are emerging. During this scanning process I recently came across a very interesting industry that looked quite promising to me. It has been wise for investment professionals to ignore this industry over the past six years, but this year could be different. Fair warning: Before I proceed, you need to leave your opinion at the door.
Just two days ago the 4th quarter GDP came out as a negative number, which was much worse than expected. In fact, not one of 83 analysts had anticipated a negative number, meaning they were all too bullish on the 4th quarter growth number. But yesterday the Chicago Purchasing manager’s index, a growth barometer, was way above expectations for growth, and not one of 48 analyst estimates was in the ballpark, meaning they were all too bearish on growth.
In my last column, I described a bearish scenario where the markets come to the realization that the monetary authorities are out of bullets. This was simply an exercise in critical thinking and doesn’t actually line up with our current forecast, and I did promise I would come back with a bullish scenario.
Most Pinnacle Advisory Group clients are familiar with our view of secular (or very long-term) market cycles. My partner, Michael Kitces, and I first published a paper on secular bear markets in the Journal of Financial Planning in 2006, where we predicted correctly that stock prices were likely to deliver much less than average returns for years to come. In my 2009 book, Buy and Hold is Dead (AGAIN): The Case for Active Portfolio Management in Dangerous Markets, I reviewed in some detail the rationale for why stock prices can disappoint investors ‘on average’ for decades. (In fact, the “(AGAIN)” in the book title referred to the fact that we’re currently laboring through the fourth secular bear market since the 1900’s.)
One of my favorite scenes in the Pixar movie Finding Nemo comes at the end. The fish had managed to outwit the Dentist (who was holding them captive in a tank) by dirtying the water enough to force a water change. In order to do that, the Dentist had to bag the fish and leave them outside the tank, at which point they jumped out the window and into the harbor below. Unfortunately, they hadn’t considered how they were going to get out of the plastic bags. The movie ends with one of the fish asking, “Now what?”
Everybody knows that the dice are loaded.
Everybody rolls with their fingers crossed.
Everybody knows that the war is over.
Everybody knows the good guys lost.
Everybody knows the fight was fixed.
The poor stay poor, the rich get rich.
That’s how it goes,
Leonard Cohen, “Everybody Knows”
The 2012 election is over and we now know who our president will be for the next four years. We’ve received questions from clients asking what we think the market is likely to do in light of the election. While we don’t pretend to be political pundits, it appears that the balance of power in Washington has not changed: The Republicans hold the majority in the House, the Democrats hold the majority in the Senate, and President Obama will remain for another term. The stock market is likely to refocus on what kinds of policies may actually be implemented going forward. Campaign rhetoric is mostly just that – rhetoric. Now comes the reality of trying to pass specific pieces of legislation. Given a still divided Congress, that will likely entail a fair amount of compromise on both sides. The question is whether compromise is even possible considering that the people who couldn’t cut a deal last year are still in office.
Pinnacle Advisory Group’s Technical Analyst Sean Dillon offers his view of current market conditions.
* Could this year’s market be a repeat of the last? * Why isn’t valuation a significant factor in portfolio positioning during this current cycle? * Is government stimulus distorting the market? * Will bonds repeat the performance they had in 2011? * Which sectors and industries will prosper most in the current environment? *…