Written by Nathan White, Chief Investment Officer of Paragon Wealth Management
The confirmation process for Janet Yellen as the new Fed chair begins today. Although the questioning may get a bit feisty due to the current partisan atmosphere in Washington she is expected to be confirmed. The markets will be watching closely for hints and clues as to her thinking on all things QE.
Some short-term consensus has been building that the Fed might start to taper in December rather than in 2014 due to the recent stronger jobs report and economic data. That has caused the market to pause at these levels while trying to decipher what the Fed might do. The market always tries to move ahead of the Fed. The key indicator that we are watching is the 10 year bond yield. The closer it gets to 3% the more cautious we become. At the same time there are a lot of people and managers trying to play catch up at this time of year which puts upward pressure on equities. The overall momentum of the markets is still up for now. We are definitely more cautious at these levels and holding some cash, but the Fed, as it has done so many times, could still easily call the markets bluff and delay the “taper” continuing to send stocks higher.
We have held a cash position of around 10% for much of the year and that is the primary reason for our growth portfolios lagging the S&P on the year. However, over the last six months we have slightly outperformed the S&P while holding roughly holding this same 10-15% cash. This means we have taken less risk to get the same or slightly better return. We feels this is especially prudent at this time after such strong performance in the equity markets. Our strategy is to get as much of the upside as we can while holding some dry powder to protect against the downside and to take advantage of opportunities.
The Managed Income portfolio has been in a defensive stance for since about May. It is not gaining much for the year but is beating the bond benchmarks which are down for the year. This is a very tricky space right now and we want to keep our cards close to the vest and wait for opportunities when they come – but they are not here yet. If the 10 year cracks north of 3% we see some good intermediate term opportunities.