Monthly Newsletter – October 2014

Hello Everyone:

Quarterly Asset Allocation.   At the end of each quarter, I review the asset allocation of each account and make adjustments when necessary.  If you have any questions, please give me a call.

 Volatility Returns to the Markets; Implications for Your Portfolio.  Volatility makes investors uncomfortable and ‘edgy’ and this has been a valid concern recently expressed by some of our clients, particularly those who have been with us less than 3 years.  So I wanted to spend some time in this newsletter putting volatility in context.

Volatility is an integral part of the market; it is not normally the harbinger of a crisis although it can be. The vast majority of the time however, it is a response to either technical indicators or anticipated changes in earnings.  As I mentioned in the last newsletter, we have to stop looking at volatility as only a Crash/Soar paradigm and look to see if buying opportunities are being created.

The Most Important Thing to Remember about Volatility is That We Have a Strategy to Deal with It.  We are not going to be caught like a deer in the headlights; if our asset allocation is disrupted by volatility resulting in a sharp decline in equities, then we will respond by selling bonds and buying equities to come back to our original 60/40 allocation.  This is what we did during the crisis in 2008-09; we bought back equities and recovered very quickly.  We also retained strong allocation to U.S. equities rather than being dragged into the hyperbole of emerging markets, high yield junk bonds and scary ‘alternative investments’, i.e. hedge funds. As I have often said on BNN, I do not know what the markets are going to do.  I only know what I am going to do, which is to only buy high quality liquid investments, keep costs low and rebalance the allocation of your portfolio when necessary.

Classifying Degrees of Volatility.  Sam Stovall is the Chief Market Strategist for S&P and I have made some very good decisions for our clients based upon Sam’s observations.  Recently, he spoke with Andrew McCreath on BNN and described various market characteristics:

0-5% decline- just noise

5-10% pullback-recovery in 2months

10-20% correction- recovery 4 months

20-30% bear market-recovery 17 months

In looking back to the crash of 1987, Stovall reminds us that markets were very different then--rates were rising and both inflation and stock market valuations were very high. When investors look at current markets they fear that there hasn’t been a correction in 36 months but by 1997 there hadn’t been a correction for 84 months so this is not that unusual.

Similarly, Bruce Cooper, Vice Chair of TD and soon to be Chief Investment Officer, opined that market pullbacks are quite normal but that the U.S. has good momentum in job growth, low interest rates, and  corporate earnings up 10% in the second quarter.  Blackrock CEO Larry Fink remarked that the7% sell off last week from market highs on Sept.18 ‘weeded out the excesses’ and was mainly ‘hot money’ and hedge fund borrowing.

David Rosenberg was known as a perma –bear but he switched sides 3 years ago. His comments are incisive:

“The major averages have all broken key support levels…three years of unusual calm are being mean-reverted by three weeks of unusual volatility… the real abnormality was to go as long as we did without a meaningful pullback, which is part of the normal market cycle even if we don’t like it.  It’s like rain in the summer...it is imperative to take a deep breath and realize that what is most important for building wealth is not ‘timing’ the market but rather ‘time in’ the market... Sure some cash should be raised….but one still has to be engaged, because it is very likely that this is only a near term pause in what is still an overall uptrend.”

Your Portfolio.  We have added some equities to clients who joined us in the past year who were ‘underweight’, however we are maintaining our overall asset allocation.

Thank you for your business.

John

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