As I mentioned in my March newsletter, the stock market has churned sideways for the past 14 months. This sideways consolidation has been accompanied by some big moves both up and down, as you can see from the chart below.
Global economic growth has been slowing since early last year, which is the main reason for the increase in stock market volatility and directionless longer-term trend. I believe the direction of the stock market in the coming months will be dependent on incoming economic data which will help determine whether this period of economic weakness is ending or if we are heading into a recession. The concern with recessions is that they historically are accompanied by some of the biggest declines in the stock market. So monitoring market technicals and using sound risk management strategies is paramount given the current economic environment.
From a short-term perspective, the stock market is in a strong uptrend. As I mentioned in previous updates/newsletters, the stock market experienced a strong improvement in breadth (breadth thrust) earlier this year which was a signal that we transitioned into a bull market environment. Within this type of environment, any pullback in stocks should be viewed as an opportunity to increase equity exposure.
In my March 20th market update, I mentioned market internals were suggesting that we could be due for some type of short-term weakness in stocks. The weakness that we experienced ended up being pretty minor. The S&P 500 fell only 2.1% peak-to-trough.
Since then, market internals have strengthened providing further evidence that the stock market, at least in the shorter-term, remains bullish.
Stock market conditions warrant being fully invested. However, we are near the end of the business cycle and economic growth has slowed considerably. If the economy continues to weaken, stocks will likely reverse course. Because of this, it is important to monitor market technicals and employ risk management strategies to limit downside risk if conditions deteriorate.
If you want an explanation of the business cycle and how it typically affects the stock market, I have included this topic in our 3 part educational video series. To have the video links emailed to your inbox, you can signup here: Yes, send me the videos!
Client Account Update
Over the past month, I have increased our equity exposure from 20% to about 57%. In addition, we have approximately 25% allocated to bond funds, with the remaining amount sitting in a money market fund.
Summary of How I Manage Client Accounts:
- I do not use a buy-and-hold approach like most financial advisors. I believe this strategy, while good for young investors, can have severe adverse consequences for those in or near retirement.
- I use technical analysis to manage risk and preserve principal during major stock/bond market corrections.
- I have two basic models that I use to manage client accounts. One is conservative and appropriate for investors that are in or near retirement, and an aggressive model for younger more aggressive investors.
- I am a risk manager and will increase our risk level when risk in the market is low, and decrease our risk when risk in the market is high.
If you have any questions, or if you want me to review your retirement account allocations, please feel free to contact me.
Craig Thompson, ChFC
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.