Services d’Investissement Férique

 

Title: December Market Review

Subtitle:  Time to review portfolios.

 

The approaching yearend provides investors with a perfect opportunity to review economic and financial developments and to use the information to rebalance their portfolios.  As the curtain closes on 2012, the economic picture is mixed, showing however recent positive indicators. This coupled with the large amounts of cash on the market sidelines, suggests that short and medium-term moves would favour equities.

 

Labour force statistics on both sides of the border have been bullish. Canada and the United States created 59,300 and 146,000 jobs respectively in November and unemployment rates in both countries were in the highly-respectable seven percent range. According to the Case-Shiller Index the US housing sector has also been showing some signs of life driven by continued low interest rates in advanced economies which remains a big positive for the investing/business environment.

 

Balancing between equities and fixed income

Professionals typically recommend a mix of fixed income and equity securities with recent developments generally more favourable to the latter category. That said, choosing correctly is key. Properly rebalancing stock and bond investments is one of the most important decisions investors will ever make.

 

Ironically, at first glance, investing more in bonds this year would seem a logical course. As at December 1rst, the S&P 500 was up by 12.61 percent terms and the S&P/TSX yielded 2.38 percent (both in local currency terms). This means that in balanced portfolios, stocks generally did better than bonds, which implies that investors need to buy more bonds to get asset mixes to the proper weightings.

 

However the 2007/2008 financial crisis and the ensuing recession/slowdown considerably unbalanced many portfolios as investors, including individuals, large pension funds and institutions, boosted bond holdings and reduced equity positions as a result of the uncertainty. As a result portfolio equity holdings are below historical weights.

 

The challenge is that as the investment climate improves this money will presumably one day re-enter the stock market . This in turn will put significant upside pressure on stocks, leaving those who did not rebalance their portfolios fast enough, in the dust.

 

Turning the corner

When that will occur remains an open question. Recent work by Ken Rogoff and Carmen Reinhart suggests that the effects of financial crisis-induced recessions linger longer than those following typical cycles. This implies that even five years after the recent troubles we still cannot be sure how things will turn out. Continued worries related to European sovereign debt and US fiscal cliff negotiations are just one manifestation of current unease.  

 

That said, at some point the economy will pick up enough steam to push market sentiment will into bullish territory. The precise moment that this will occur is impossible to predict.

 

However when that does happen those that regularly rebalance their portfolios, will both profit from the upside, because they kept their equity holdings in line, and will be protected on the downside, to the extent that they also kept some holdings in fixed income instruments.

 

peter@peterdiekmeyer.com

 

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