“By every measure, this market is overbought, overextended, and overvalued,” said Lance Roberts, portfolio manager at STA Wealth. Roberts sees a lot of warning signs for the market, that include falling earnings, weak economic background, and high valuations, but he also believes that his technical analysis points to short-term bullishness. Only time will tell. Also found at MarketWatch on 5/20/15, “We have been expecting the market break out to new highs, but the rally has been a lot less exciting than we hoped for. The (expected) breakout is still valid, however,” said Andrew Adams, chief market technician at Raymond James. Adams goes on to say, “What this tells us is that it’s a traders’ market; people are making very short-term bets and are staying away from big long positions because valuations are high.”
As theS&P 500 and DJIA reached new highs, the rally has lacked breadth, which may be a sign this bull market is running out of steam. Only about 50% of all stocks traded on the NYSE rose on May 18, 2015, according to Andrew Adams. MarketWatch reports,“Overall trading volumes have been unusually thin, with Monday’s session (5/18/15) seeing the second-lowest volume so far this year.”
Flat from here
On 9/16/14, CNBC reports that Goldman Sachs strategist David Kostin and his team see the S&P 500 rising to 2,150 in the next couple of months, which may be another 1% increase from levels on 5/18/15, but seesawing up and down, settling around 2,100 by the end of the year. Stocks have soared above the tombstones of previous bull markets, ignoring the growing signs of weakness around the world. As the Europeans toast to Gross Domestic Product growth of 1.6%, which isn’t as bad as their recent 0.7% increase, analysts on this side of the pond are putting paint on the pig on what they expect to be a lackluster second quarter in the US. So the Fed is not inspired to raise rates any time soon. That Is no reason to celebrate. The conscious observer can see that dismal economic reports really do reflect overall economic weaknesses.
The highest compliment one professional can pay another is a referral. A professional licensed in insurance asked my team to meet with a couple with over $2M in their liquid portfolio outside the real estate properties they own. First, with longevity being the wild card, we noticed their withdrawals set at 7% since 2005 when they established their trust were very high. Second we pointed out that 95% of their liquid assets were in 24 stocks. Third the account in 2008 appears to have experienced a loss of -37%, which is about the same as the loss in the S&P 500 that year, according to Yahoo Finance. With a drawdown of -44% (-37% + -7% = -44%) requires a gain of 78.5% just to get back to their starting value on 1/1/08. We asked the question, “Do you like those odds?”
We can’t foresee the future, but we can learn
As long as the stock market continues to hit new highs, this arrangement will work out just fine. Until it doesn’t. Average investors may have 1 to 3 different asset classes representing legs under their portfolio stool. When we look at the 2014 Yale Endowment report ending the fiscal year 6/30/14, however,we see 8 different asset classes. It might be smart to learn from endowments and foundations. This isn’t a one size fits all recipe for success. It’s more like an opportunity for you to determine what is right for you.The first step is to see what you can learn. The second step is to see how different strategies might serve you. Whereas many investors own cash, bonds, and stocks or up to three asset classes, when we look at the Yale Endowment, for example, we can identify eight different asset classes. Who knows which combination might work better for the investor, we do know thatmore asset classes gives us more diversification.
Let’s start with that with which you are already familiar. Individual investors may have portfolios made up of cash, US stocks, and foreign stocks. At Yale Endowment as of 6/30/14 you may be surprised to see 4% cash, 5% fixed income, 4% US stocks, and 11% internationals. That makes for a total of 24% in traditional asset classes that may represent 100% of the holdings of individuals. This means there is 76% of Yale Endowment in Other asset classes, or Alternatives, those things that are not cash, bonds and stocks. Again, with $24B at Yale Endowment we can see the balance of the portfolio; 17% Absolute Return, 8% Natural Resources, 33% Private Equity, and 18% Real Estate. If stocks turn around and hit new lows and success leaves clues, please answer this question for yourself.Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies. The Yale Endowment is an institutional investor and may contain positions that are not appropriate or not available to all investors. To determine which investments may be appropriate for you, consult with your financial, tax or legal professional.