To All: Portfolio Strategy
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133 Fleet St., London, EC4A 2BB, England
FEBRUARY ~ Global equities have returned 8% year to date, outperforming bonds by 5%. We were right to stay long equities. However, our 12-month return expectations on equities are down to 7%, representing only 2% more than cash but well ahead of our prospective bond returns of less than 1%.
Despite the strength of the rally, we are staying overweight equities versus bonds. The biggest risk to equities is a selloff in bonds and we do not see this happening near-term. As long as bond yields stay low, earnings growth will probably be sufficiently strong and equity valuations are sufficiently reasonable to stay overweight equities.
800 Wagon Train Dr. SE, Albuquerque, NM 87123
MARCH 2 ~ Consumer confidence highest in 30 years. This was the big news item of last week. It certainly sounds good. But remembering that the best news is seen at the top of markets and the worst news comes out at the bottom, I thought it might be worthwhile to take a closer look at this statistic. In fact, last week's consumer-confidence reading came very close to the record, that was actually set not quite 30 years ago. This month's reading was 138.3, compared to 142.3 in October of 1968. Consumer confidence has been on a steady rise since 1993.
. . . In October of 1968 . . . it was again approaching the 1000 level. . . . That month was the exact top of a market advance and was followed over the next 18 months by a loss in the Dow of 36%. A similar reaction from the current levels would peel about 3000 points off the Dow, taking it to about 5500. We tend to forget, in the light of what appears to be good news, that the market is not coincident with the economy, it leads the economy. When all the good news is coming out, the market has already moved up in anticipation of that news. People are not optimistic because they are going to buy stocks, they are optimistic because they already have bought stocks. The rise we have seen in the market reflects the good news and the optimism that is just coming to light.
In October of 1968 the market had been in a long advance, which had started in 1962 and which had taken the Dow from 550 to 1000, a rise of 82% in six years. Today we are seeing a market that has been going up steadily since 1995, a period of less than four years. The Dow has gone from 3700 to 8500 in that brief time, for an advance of 130%. Now, with a similar level of consumer exuberance, it would seem as though the market is again very overbought on a long-term basis.
-RICHARD W. ARMS JR.
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Personal Path
I think the risk reward relationship calls for parking funds into cash. Of course again going against the wisdom of the wise men who are against market timing.
Pancho |
