Quarterly Market Updates

MARKET UPDATE AND OUTLOOK : July 2011

What’s new at J.P. King Advisors, Inc.?

This past quarter we attended three industry leading conferences: the Financial Planning Association Northern California conference, the Fidelity Investments Inside Track conference, and the AQR Capital Management conference, held at Stanford University. All were well organized and offered many outstanding sessions given by leading academics and industry experts.

One of several highlights was a presentation about Social Security at the FPA conference. We learned about different strategies for maximizing social security benefits. Particularly for a married couple when both spouses have worked, there are various scenarios, including delaying retirement payments, which can significantly improve the amount of money received over the couple’s lifetimes. As a result, we have acquired a new software program that can help demonstrate which combination of choices for each spouse might be most beneficial. For anyone, single or married, nearing social security age, we strongly encourage you to meet with us to learn more about the various options you have before making any decisions.

Regarding investments, we attended multiple presentations focused on the latest risk reduction techniques. Research continues to suggest that what was once considered a “diversified portfolio”, a 60%/40% stock-bond mix, isn’t as diversified as one might think. In reality, that 60/40 portfolio is extremely correlated to the moves of the stock market, and historically over 90% of the risk in the portfolio is attributable to stock market risk. Investors know diversification is good, they just don’t realize that diversifying their total portfolio risk is what is most critical, and precisely how to do so. We are confident that our investment philosophy and process addresses these challenges. We will continue to use the latest research and techniques to build upon and improve our portfolios.

We appreciate the introductions to friends and family we continue to receive. Shortly, we will email you an updated Firm Overview presentation. This is an informative document that outlines our services and our approach. It’s designed to keep you updated about our firm, as well as something you are welcome to share with anybody who might benefit from our services. Thank you for continuing to think of us.

Looking back

The second quarter of the year was essentially flat for stocks, with the S&P 500 Index up about 1/10 of a percent. International stocks fared about the same for the quarter. The markets here and abroad, have been grappling with the ending of the Federal Reserve’s Quantitative Easing 2 program, a slowing U.S. economy, and fears that the Greek debt situation will unravel and drag down Europe’s banking system with it. Although stocks just broke even for the quarter, we’re pleased to report that virtually all of our client accounts were positive. For the past 12 months, stocks were up significantly, both U.S. and foreign, and our portfolios captured an appropriate portion of that return, depending upon the objective of each account. 

Bonds rebounded from two weak quarters with gains of just over two percent for the quarter. The same uncertainties that dragged stocks down served as a boost for bonds. The yield on the ten year Treasury bond fell from almost 3.75% to 2.85% during the quarter. (Yields move inversely to prices). At a current yield of about 3%, we continue to think there’s not much upside in traditional U.S. government bonds.
 
In the Alternatives space, Gold marched steadily higher with a 4.4% gain. We continue to view Gold favorably and uniquely positioned as an alternative currency. Oil dropped 11% for the quarter and this dragged down diversified commodity funds. Our Long/Short and Market Neutral Funds did not move much for the quarter with performance generally flat. The one noted exception was Hussman Strategic Growth, which returned over 3% for the quarter. Hussman has been defensively positioned for some time, and that served the Fund well during the quarter.

Looking forward

Many of the concerns we spoke of last quarter, such as high unemployment, real estate market doldrums, fiscal deficits, debt crises in Europe, and overheating emerging market economies, have continued to stir the markets.

Last quarter we stated that we expected the market to moderate over the next few quarters. So far, that vision has been validated. We still think that is the most likely scenario for the near term. The market tends to take two steps forward and one step back. Over the last two years the steps have been mostly forward, with the second quarter of last year being the notable exception. It wouldn’t be surprising to see the market “muddle” along, digesting the sizable gains from the past couple of years.  

We think the evidence suggests that the economy will continue with this slower than normal recovery. There are economists who are in the camp of a looming double dip recession. Although we think there’s a chance of that, we think that chance is less than 25%. We think the most likely scenario is that the recovery continues, albeit at a painfully tepid pace. If that’s the case, the market will most likely be somewhat limited on further advances.

We feel very good about the recent changes to our models and current portfolio positioning. We will continue to monitor and evaluate all current investment holdings, as well as additional new opportunities. Our portfolios don’t require strong stock markets to generate returns sufficient for our clients to achieve their financial goals.

We would gladly enjoy discussing any of our comments in greater depth with you. We encourage you to call with any questions you may have or to schedule an appointment for a more thorough review of your situation. Thank you for allowing us to assist you in managing your financial lives.

James P. King, CFP^®, Scott Horton, CFP^®