Due to the volatility in the markets over the past few days, we wanted to reach out and let you know of our thoughts and the actions we are taking. We have been saying that this sell-off is long overdue for some time. It is the reason we have been holding a lot of cash and have been more defensive in our portfolios.
•Monday morning dramatic drop (which will be repeated endlessly by the media) was an aberration as most stocks were not open for trading yet. Prices quoted were not actual bids and offers in many cases. Many stocks and ETF’s did not open for trading until after the first half hour. It was panic selling that was very mispriced.
•Overall, this is a healthy event for the market as it lets off much needed steam
•This downward move helps to take risk out of the market
•In the short-term, we are buyers but will move cautiously as we watch how things play out
•We have been selling some positions that have tax losses and adding commensurate exposure in other areas
•U.S. economy is in same situation as before which is fine but not great (nothing has fundamentally changed from one week ago!)
Although the current volatility creates short-term opportunities, there are still things that need to be worked out for the bull market to continue higher longer-term:
•China: The Chinese economic slowdown has dramatically affected commodities. The weaknesses of a command-and-control style of government has become apparent in the government’s futile attempts at controlling financial market moves lately. The devaluation of the Chinese currency is negatively affecting emerging market currencies and finances with some similarities to the 1998 Asian currency crisis. All of this is basically an adjustment as China got ahead of itself economically and now has to retrench and absorb the excess as their economy changes.
•The FED: Our central bank is boxed in a bit trying to move off of its historically accommodative monetary policy as the unintended consequences will have to be dealt with and priced in by equity and bond markets.
•Slowing corporate earnings growth: slower, but still growing, earnings were making the market a bit stretched at the prior valuations. Market corrections help to mitigate this risk. Fourth quarter earnings will come in higher on a comparison basis and in contrast to the prior three quarters.
Going forward we will be watching how the market reacts with an eye to opportunistically sell on the rallies and buy on the dips as the “Adjustment Period” we have been calling for continues.
Written by Nathan White, Chief Investment Officer of Paragon Wealth Management
Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
A dynamic and proactive way to invest.
BACK AND FORTH
by Dave Young, President
The U.S. stock market is in a rut. Since the end of last year, little progress has been made. In the last three months, it has moved back and forth in a trading range 10 times. Volatility has increased, with larger daily moves than we have seen for some time. During the month of March, major indexes closed down about 1.5 percent.
Many markets around the world hit all-timehighs during the first quarter, which, depending on your perspective, has its ups and downs. For momentum or trend traders, it’s positive, because they ride the trend as long as it lasts. On the other hand, for range traders it’s negative. We are currently hitting the upper end of the range, which may mean it’s time to sell.
Last October, we had a 10 percent pullback. It is too early to tell, but so far it seems the market leadership of large cap stocks and the S&P 500 may finally be changing. Since the October correction, the S&P 500 has lost relative strength.
Contrary to what doomsayers perpetually predict, the dollar has been incredibly strong for the past nine months. So while it may be a great time to go to Europe, it’s somewhat tricky for investors. In addition to determining where to invest internationally, it is important to make sure your dollar exposure is hedged properly. After falling from $106 to $46 in six months, oil has recently found some stability. This is in the face of analysts calling for $30 oil. Opportunities to invest seem to be spreading out from the U.S. We are entering a transition period where the markets are offering new opportunities and risks.
The bond market continues to be somewhat of a conundrum. We have been at all-time lows with the 10-year Treasury bond yielding around 1.85 percent. That means if you bought that bond today, you would earn 1.8 percent for the next 10 years. By way of comparison, Germany’s 10-year bond is yielding an unbelievable 0.20 percent. In fact, in a number of European countries, you would have to pay the government if you bought shorter-term debt because they have a negative yield.
The bottom line? Rates are at all-time lows around the world. And because of that, we know rates will eventually rise. When those rates rise, many investors will be hurt. If rates were to move up quickly, bond investors could potentially see volatility and losses similar to what we see in the stock market. Investors invest in bonds rather than stocks because of their historic level of safety. And that’s a problem considering today’s market. When interest rates move back up to their historical norms, that illusion of safety could easily evaporate. Interest rates were supposed to move up two years ago. They didn’t. The FED determined the economy was too weak. Ever since then, investors have expected rates to move up. Most recently, rates were supposed to move up this coming June. Simply put, it’s a guessing game. There are many variables at play and no one knows when rates will rise. The problem is that we have to protect Managed Income from those eventual rate increases. Protecting the portfolio has a cost, in that we give up some of the meager returns currently available. We will continue to do our best to protect the portfolio and pull out whatever returns are available without putting the portfolio at undue risk. When we move off these all-time lows in rates, we should have better opportunities to once again capture returns in the conservative space.
Active management strategies are coming back into favor. This usually happens later in a market cycle — after the easy money has been made. Early in a market recovery, almost any strategy will work because almost everything is moving up. This is when everyone appears to be a genius.
Later in a recovery, as many asset classes approach full value, it is more difficult to generate returns. Typically, that is when active managers outperform. This is also about the time many investors switch from active strategies to passive ones. Historically, because of the increased market risk, that is exactly the wrong time to make the switch. We have seen this change in opportunity within Top Flight over the past quarter. Top Flight Portfolio returned 3.98 percent net of fees for the first quarter versus 0.96 percent for the S&P 500. From its inception in January 1998 through March 2015, Top Flight has returned 615 percent to investors versus 193 percent for the S&P 500. That works out to a compound rate of return over that period of 12.08 percent compounded for Top Flight versus 6.42 percent for the S&P 500. Please see full track record and disclosures on page 7.
WHAT IS AHEAD?
It’s the question I get asked repeatedly. While no one really knows, there are factors we do know. We know we are likely in the latter third of this bull market. This bull market is the fourth longest in 85 years. From a low of 6469 on March 9, 2009, the Dow Industrials has gone up an additional 11,700 points. Other issues include:
• How does the market usually react to a severe drop in oil?
• What does the market usually do in the seventh year of a president’s term?
• How does a rapidly rising dollar affect the market?
• Stocks are overvalued by most historic metrics but undervalued relative to interest rates.
The list is endless. We do our best to separate out those factors that matter and adjust our portfolios accordingly. We apply those factors to our investment strategy to give us a framework. More importantly, we process the actual market data through our models, then react to that data as market conditions change. For example, Top Flight is currently holding about 30 percent cash, which is its highest cash allocation in some time.
Investing is difficult. As I have said before, there are 10 ways to lose money for every one way to make it. Fortunately, Nate and I have a combined market trading experience of 50 years. As they say, “This is not our first rodeo.” Our objective is to make sure you are invested according to your risk comfort level. Each of our clients is invested differently depending on age, goals, total net worth and investment experience. In order to achieve investment success, you must be invested in a way that allows you to stay invested over the long term, through market ups and downs.
Please let us know if you would like to discuss your investments or make changes to them. We appreciate the confidence you have placed in us.
Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions. 3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index. 4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.
Written by Dave Young, President & Founder of Paragon Wealth Management
2012 continued the volatility that’s characterized markets since the global financial crisis, which will be marking its fifth anniversary in
September. This year’s market moves were driven by three primary issues, Europe, the Middle East, and U.S. Politics.
We had a back and forth flow of good and bad news all year out of Europe. Positive indications for Europe’s economy in the first quarter led to the strongest start for markets in recent memory. These gains were promptly given back as concerns rose in the second quarter. Markets then rallied in the second half of the year when the European Central Bank announced that it would provide liquidity to governments and financial institutions – to the point that for 2012 as a whole, Europe’s stock market actually outperformed the U.S.
Middle East problems added to the mix this year. This time it was Syria, Libya, Egypt, Israel and Iran that kept things stirred up.
Problems there always add an element of fear to investors in the U.S.
Our politicians provided a lot of political theater due to the election
year. Markets rallied from June through October and then sold off into the election. After a short post election sell off, the markets surprised a lot of nervous investors and rallied through December.
The final act of the year was the drama surrounding the “fiscal
cliff”. According to the press the fiscal cliff was the “Big Scary” issue that was going to sink the stock market. Instead, our politicians
came through an hour before year end and voted on a 150 page bill they had three minutes to read. As usual, it doesn’t cut spending, doesn’t significantly raise revenue and kicks the can down the road another few months. The more things change the more they remain the same.
Overall the year was very volatile and very choppy. The surprise this year was that in the face of all of the negative news most markets moved higher.
The Outlook for 2013
In the short term, through 2014, there are a lot of reasons to be bullish on stocks. The US housing market has hit bottom and should be a positive force in 2013.
Growth in the middle class in emerging markets will continue to provide opportunities for investors and for companies selling into those markets. Huge new oil discoveries should put a cap on the price of oil, which is always a boost for the economy. Stock valuations are still favorable. Low interest rates that hurt bonds are very good for stocks.
Over the long term, I have some serious concerns. The biggest obstacle is going to be the debt that our politicians continue to grow.
We are 16+ Trillion in debt and going further into debt every day.
Forty two cents of every dollar that the federal government spends is still borrowed from our kid’s and grandkid’s future. Based on current policy, that 16 Trillion dollar debt isn’t going to magically disappear. At sometime in the future it will have to be addressed. If it isn’t then we will experience a real cliff. That is the one that we will be watching out for.
Investing is difficult. It rewards those who have the discipline to stick with their long-term strategy during challenging times. It punishes those who jump in and out and are always chasing what worked most recently.
Always focus on what you can control. That includes managing your risk by making sure your risk tolerance is set properly. Following a disciplined, systematic process that has a long term track record. Stay focused on your strategy and let the long-term results take care of themselves.
We appreciate the opportunity to be your financial advisor. Please contact us if you have any questions or concerns.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.