On Wednesday, John and I spent the better part of a morning talking to fund managers from companies like PIMCO, Mainstay, Goldman Sachs, Federated and RS Funds. We feel that markets are heading for a crossroads sometime this summer. Our reasons for this belief is that QE2 (Quantitative Easing) will end the first week in June; oil prices continue to rise because the Middle East problems don’t seem to be going away anytime soon; job creation remains average at best, and politics continues to take precedent to governing so fiscal austerity is kicked down the road. We feel it is our job to take these complex situations and try to make them as easy to comprehend as possible so you know what to be watching for. Over the last 5-6 months, we have made changes in your bonds in anticipation of inflation and the end of QE2. After our discussions with bond fund managers today, the consensus was treasuries were going to be slaughtered and bonds with long durations (number of years before they mature) will pay a heavy price in the short term. Since we now own very little in form of treasuries and the duration of most of the bonds we own is short term, we feel good about that portion of your portfolio.
We also came out of these conference calls feeling that our equities (stock funds) were correctly allocated with where the market is now. If anything, we have erred on the side of safety through the years. However sometime this summer the market will take one of two roads:
1. The road where there is continued slow GDP growth and companies continue to increase hiring and spend the immense amount of money on their balance sheets. The impact to the end of QE2 is absorbed by the economy. The Fed still does not move rates higher for the remainder of the year and into 2012. Growth in the equity markets will be in the high single digit range although volatility returns.
2. The road where there is little to no job growth and the Fed even begins discussions about a QE3. GDP is 1-2% and a “double dip” in the markets becomes a concern. Since the markets have not priced this scenario in, a sell-off of some magnitude is a distinct possibility.
Even if Scenario 2 occurs, we have a plan that would make sense including using emerging market funds that prices the fund based on other currencies ….not our dollar. We’d look to return to treasuries as there would be a flight to safety and we’d look at increasing commodity holdings. As usual, we will continue to meet with portfolio managers and other specialists at our disposal to obtain data necessary to make decisions. We know you might be feeling ill at ease about what is going on in Washington and the World, but we are aware and as always, planning tactically for your portfolio.
International and emerging market involving involves special risks such as currency fluctuation and political instability.
Government Bonds and Treasury Bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.