“Your Vision, Our Expertise: Your Peace of Mind” ®
 
 

 

Market Commentary 6/30/2017

Is low volatility a sign of investor complacency?

As of the midpoint in the year, many of the headlines remain the same.  World economies seem to be on the road to recovery even with energy prices plummeting.  The U.S. led recovery may be slowing even as major indices have propelled ahead setting new milestones.  The Dow Jones Industrial Average and the S & P 500 were up more than 9%, while the NASDAQ Composite Index and the MSCI EAFE (International) Index were up more than 14%.  Morningstar Moderate Target Risk Index was up 6.90% year to date.  The U.S. market has outperformed since its bottom in 2009, elevating its market capitalization to near historic highs while overseas markets remain low according to a recent American Funds article.  To add fuel to this positive picture, the economy continues to grow with manufacturing, capital spending and earnings all strengthening, yet valuations are stretched in many sectors.

Portfolio managers are concerned that the market continues to ignore high valuations in U.S. stocks. The word that shows up in most articles these days is “worry”.  Last quarter we wrote about volatility and preparing for turbulent times in order to create awareness that times like these are when investors can easily become complacent and caught up in the successful performance of their portfolios.

A recent article in the Wall Street Journal may help us to understand the lack of volatility.  In 1993 the volatility index (VIX) was created.  VIX is a measure of the volatility expected over the next 30 days and is sometimes referred to as a “fear gauge”.  Although this is a short-term measurement, the VIX was in the lowest 1% of historical readings as of June 30th.  Investors are concerned about central banks ending their monetary stimulus (easy money), yet their appetite for stocks continues.  As the market has moved up, investors have formed a belief that the market is one directional, which is not the reality. If unmonitored during market advancements, stock appreciation can affect the asset allocation balance, potentially increasing the risk exposure of the portfolio.

We have all heard the expression “Don’t worry be happy”.  In order to be happy and not worry about what we can’t control, take control of what you do know.  As investors we need to be aware of what influences or drives our decisions, not our emotions.  We think that understanding your risk is more important than trying to guess when the market will go up or down.  Knowing where you stand relative to your needs and goals goes along with managing the element of risk.  Risk should not be a concern if you know your plan.

Over the past decade many investors have shifted money from cash, savings accounts and certificates of deposits without understanding the risk being added to their portfolio. Portfolios that allocated more into domestic stocks over the last 8 years enjoyed boosted portfolio returns, but that doesn’t address managing risk, a key component to long-term success.  It is okay to have measured risk within a diversified portfolio as long as it meets your lifestyle needs and objectives. Under current market conditions awareness of risk is low.

Our philosophy is to continually rebalance in rising markets and reevaluate your allocation to smooth out the volatility that will occur from time to time.  In our meetings, we spend time discussing how much to allocate the portfolio based on your risk tolerance and time horizon.  Having the right asset allocation prepares your portfolio for downward pressures.  In the months ahead, we will continue to evaluate your portfolio to keep it aligned with the asset allocation that meets your risk parameters.  Keep in mind that prudent investors don’t wait for the alarm to sound; they take profits to preserve assets for future needs.

We welcome your questions and look forward to our next meeting.  Enjoy the summer months knowing that your diversified portfolio will prepare you for any future volatility.

 

Thomas L. Menzel, CFP®

President/Principal Owner

 

Mackintosh, James. “Spike in VIX Fear Gauge Should Set Off Alarms.” Wall Street Journal, July 5, 2017. “2017 Midyear Outlook: Global Economic Picture Brightens.” Capital Group, July 2017.


IMPORTANT DISCLOSURES: The opinions presented in this communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy. Information obtained from sources is considered reliable but is not verified. The research and other information provided herein speak only as of it date. We have not undertaken, and will not undertake any duty to update the research or information or otherwise advise you of changes in the research or information. Performance information presented is not an indication of future results and index data is provided for market reference purposes only. This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. This document is the property of Legacy Financial Advisors and is intended solely for the use of the Legacy client, individual, or entity to which is addressed. This document may not be reproduced in any manner or re-distributed by any means to any person without the express consent of Legacy. This material is for educational purposes only. Mis-transmission is not intended to waive confidentiality or privilege.