Quarterly Market Updates
MARKET UPDATE AND OUTLOOK : October 2010
What’s new at J.P. King Advisors, Inc.?
Later this month, on October 27th, we’re pleased to host our next client event. It will be a presentation covering the current economic outlook and market analysis. Our featured speaker is Doug Pratt. Doug last spoke to us in February 2009. If you missed him then we especially encourage you to join us this time. Given the upcoming elections and the general uncertainty in the economy, this presentation will be exceptionally timely and informative. If you have not yet signed up please do so soon: we hope you can join us.
We offer a special welcometo the three new clients who joined our firm this quarter. We’re pleased to welcome you aboard and look forward to working together for many years to come. Thank you to all of our clients for continuing to introduce us to your interested friends and family; we appreciate you thinking of us.
If you’ve paid close attention to the stock market this year you might compare its performance to that of a tumultuous roller coaster ride. The first quarter started off pleasantly enough, with the S&P 500 index rising about 6%. The second quarter brought a much scarier experience, with the index dropping 12%. And then the third quarter saw an exciting rebound back up, with a gain of about 11%. After all the rising and falling however, the index sits at a not so impressive gain of a little less than 4% for the year. We’re happy to report that our investors have generally fared better. Each of our models has out-performed the S&P 500 index this year. Almost all of our clients’ portfolios are up somewhere between 6 and 9%, almost double the return of the S&P 500 index. Most importantly, we’ve achieved these results with significantly less downside volatility, as we illustrated in our recent September Investment Bulletin which summarized portfolio performance across July and August.
Some of the changes we made earlier this year have already paid off. Increasing our allocation to Global Bonds, (by adding to Templeton Global Bond Fund) and introducing direct exposure to Asian equities, (by adding Matthews Asia Dividend Fund), have been solid positive contributors to overall results. The Templeton fund has a total return of nearly 12% for the year, during which time the S&P 500 index has returned a bit less than 4%, as previously stated. The Matthews fund has returned more than 14% since June 1st, compared with the S&P 500 index returning a little over 4% during that time. We believe that Asian equities and foreign bonds will continue to provide increasing positive opportunities.
Gold continued to do well and was up approximately 5% this quarter, after rising 12% last quarter. The price of Gold has now crossed over $1,300 an ounce and is up almost 20% for the year. It continues to behave more like an alternative currency, than a traditional commodity. A rather unique currency, however, in that no government can simply print more of it. This is important because every government is pushing for a weaker currency in order to make their exports cheaper.
Bonds did well for the quarter. In August, the Federal Reserve announced they would reinvest their maturing principal payments from mortgages back into long term treasuries. What this action does is help to keep interest rates low. That in turn should keep mortgage rates low for the foreseeable future.
For the past three quarters we have summarized our cyclical outlook, (meaning 3 – 12 months), as cautiously neutral. Our outlook has slightly improved to neutral. We think there are fairly equal arguments from both the optimistic and the pessimistic camps. We don’t think there’s necessarily strong enough evidence one way or the other to warrant a meaningful negative or positive bias.
On the positive side of things, corporate profits continue to shine and balance sheets look strong. The economy as a whole is trudging along and the chances of a “double dip” recession seem to be dwindling. There’s a growing likelihood that the upcoming elections will result in a “gridlocked” Washington D.C. The market tends to favor such a situation. Speaking of Washington D.C., we are about to enter the third year of the Presidential election cycle. Historically, the third year of a President’s term has been the best of the four years for stock market returns. One must never place too much credence in these types of historical indicators though; always remember that nothing can predict the future. A perfect example is the fact that September is historically the worst month of the year for the stock market… except for this September, when we got the best September returns for the stock market in over 70 years. Even so, year three of the Presidential cycle has had curiously striking outperformance, on average, over the other three years, for the past 110 years. Another possible wildcard could be the Federal Reserve stepping in with additional stimulative measures, should the economy start to slip, (this is being referred to as Quantitative Easing 2).
On the negative side…. where do we begin! We could go on for several pages about the many negatives that are out there, and we have touched on several of these in the past few newsletters. Rather than repeat ourselves, let’s just say that there are a multitude of difficult and challenging economic issues to work through. Amidst the many negative headlines however, it’s important to remind ourselves that the markets have already priced in most, if not all, of these concerns. The question is whether we will have more positive or negative surprises in the near future.
So far, this year has played out relatively close to what we expected nine months ago. Our investment approach has done exceedingly well in this “trading range” type of environment. We think we’re more likely to see markets behave like they have this year, choppy, with big swings up and down, as opposed to what we saw most of last year, going straight up. Our philosophy is to diversify portfolios across a wide range of asset classes. By doing so we are attempting to minimize the downside, like we did in the second quarter, while meaningfully participating in the upside, like we did this past quarter. Our strategy is focused on structured asset allocation combined with periodic rebalancing and cyclical adjustments. Between now and the end of the year we will be evaluating every client account to consider whether any rebalancing trades may be necessary. We are not anticipating any major changes; however, we may make some small adjustments to be sure portfolios are properly positioned going into 2011.
As always, we would 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 end of year appointment for a more thorough review of your situation. We appreciate your trust and confidence.
James P. King, CFP®, Scott Horton, CFP®
October 07, 2010