Bond markets lead all financial markets and global bond markets are hitting record lows (and yield curves are flattening). There is a message being sent about the global economy and stock markets (especially in the US) have yet to get it.
Volatility has been subdued since it jumped in January and February of this year and easy monetary policy on a global scale has given equity investors a false sense of hope.
We continue to hammer home the over-valued nature of equity markets relative to their fundamentals, yet traders and investors continue to drive equity prices higher in hope that others will join them in pushing equity prices up (S&P 500 got to within a stone's throw of its all-time highs this week).
Emotionally and psychologically, nobody wants to see equity prices move lower, because in most cases it means that their portfolio values will also go lower. That means that many advisors will likely tell you to sit tight and ride it out.
In the long-term this may make sense. A balanced and diversified portfolio of 60% equity and 40% fixed income fully recovered from the financial crisis (after about a year and some) and went on to get back to average levels of growth about 3 years later.
If you are emotionally and psychologically prepared to do that (wait it out), then that is what you can do.
If you are not, or need your portfolio to provide a steady stream of income, you need to make sure that you have enough cash on hand to ride out the storm (if and when it happens).
Cash (and low yielding cash equivalents) is always a problem for investors (and some advisors) because they think of it as sitting "idle". This can be a huge error in judgement if you force that cash (new money into a portfolio) into over-valued assets. This is what has been happening, especially in US equity markets.
Cash can be defensive. Especially if you pick the right time to put it to work:
Candian equity markets were over-sold in January and February (and few were willing to take a good look at that value because of the prognosis for oil) and if some of the cash found it's way into those assets, they performed well. So if you had re-balanced during that time (at High Rock that was one of our recomendations on BNN in December), that may have been an appropriate time to put cash to work (and we did!).
That is what our clients pay us to do.
That raises the question of "market timing".
Many investors are warned about the disadvantages of market timing (and there are academic studies that prove over longer periods of time that this strategy is less productive) and are encouraged to take a more passive approach.
However, employing market expertise to apply a more active strategy can also be effective in the short-term to add value and cushion the potential downside of an equity market sell-off.
I am not suggesting to go to all cash. Only to consider a higher (over-weight) allocation to cash: Our global equity model is close to 50% cash, which would put a 60% equity 40% fixed income portfolio at or close to 25% cash (if some of that equity allocation was also placed in our tactical value model). In the meantime there are other parts of the portfolio that are working:
One of our top picks on BNN a number of weeks back was 30 year Government of Canada bonds. Up about 5% since then. Annualized (over 60%) that is a pretty significant additional return to client portfolios.
There is a place for short-term timing and active portfolio management in a portfolio.
That is something that you pay fees for.
Be careful out there: Brexit anxiety is picking up. Volatility might spike.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist