Everyone seems to agree that the current market environment is frustrating and confusing. The major averages have done nothing and certain industries are losing. Lowry’s Institutional stock market newsletter pointed out on June 26:
Frustrating may be an appropriate word to describe the current market environment, given that the DJIA and S&P 500 have spent the majority of 2015 essentially going nowhere. However, as the sideways price action in the DJIA and S&P 500 has played out, other market indexes have not fared as well. For example, the DJ Transportation Average (DJT) is down nearly 10% for the year, while the DJ Utility Average (DJU) has declined 10.6%.
The best word is selective strength and weakness. In fairness, the healthcare, technology and biotech sectors have continued to be somewhat strong while the small company stocks that were so weak last year have come back to a degree. On the other side, some of our good funds that have made money before have become losers and need to be culled.
I find the most troubling part to be the weakness in the bond markets. We have always looked to bond funds for diversification, steady returns and some safety, yet they are sitting at breakeven or a loss YTD. The Morningstar core bond index is down 0.28% YTD as of today, July 2, 2015. This is attributable to the fact that interest rates have been forced to zero by the Federal Reserve and are likely to rise before very long.
Is a market top imminent? Lowry’s doesn’t seem to think so, as they arrive at the following conclusion on June 26:
In summary, while selectivity is evident throughout the broad market, even among big caps, it has not yet become widespread enough to qualify as a sign of an imminent major market top in the S&P 500.
What this means for our portfolio strategies is to stay invested but with our own selective strategies: all the portfolios have exposure to healthcare, biotech and technology. Most of the portfolios now have some exposure to small cap stocks depending on their risk profile. We have been selling funds with losses YTD.
The more interesting thing is that the “alternative” funds, 361 Capital and Catalyst Hedged Futures are making money now, 7.93% and 6.37% YTD respectively according to Morningstar. I have begun to replace some of the losing bond funds with these funds because they have low correlation to the stock market, meaning they are creating some useful diversification.
I have also begun to use a variable rate bond fund Catalyst Princeton Floating Rate, which is up 3.03% YTD according to Morningstar.
The bottom line is that it is very, very hard to make money in this market today because it is just so selective. Good funds and reliable categories of investments are losing money despite good portfolio management. They are just not in the selective sectors. Bonds have cost us money. And yet, Lowry’s tells us that they do not see a major market top yet.
If you have questions about your portfolio or risk profile, please contact me and we can discuss it.