This week, it’s been particularly quiet on the economic calendar, which has allowed everyone to focus on the geopolitical turmoil. The S&P, until late this morning was down 1% in the past four days and several percents in the past ten trading days. While these moves may rattle the nerves of investors concerned that a more meaningful decline in financial assets may have begun, we encourage our clients to stay informed, but not let news flow affect their economic decisions.
In fact, the economic picture continues to show signs of sustained growth, with the energy and construction sectors continuing to create jobs, while technology more recently has been resizing its workforce and cost-cutting to maintain margins. As of yesterday, 73% of the companies that have reported have reported earnings above the mean analyst estimate, the growth rate is at 8.4% compared with the estimated growth rate on June 30 of 4.9%. However negative guidance for the third quarter is running at 70% compared to the average at 64%. Only 80 companies have issued guidance.
Of significance is the fact that the Federal Reserve has stated that while it will cease adding stimulus in October, it will not drain liquidity from the system causing it to contract. Some observers cite the current environment of slow but steady progress coupled with a very accommodative Fed policy as one in which stock and other risk assets may continue to perform above long term trends for these assets, we agree.
Alpha Fiduciary evaluates risk assets from a top-down perspective, which means we consider the broad macro-environment first (geopolitical factors included), then work down in our analysis to the relative attractiveness amongst all asset classes. Presently we favor stocks, hedged assets, limited duration bonds, and liquid alternatives benefiting from the energy renaissance currently underway in the U.S.
Despite noted concerns, the recent weeks have seen risk aversion rule the day. The Ukraine conflict seems to portend escalation over resolution. Overnight, the U.S. has approved limited airstrikes in Northern Iraq. The Gaza conflict also seems to be in danger of re-escalation, and many investors are reacting to the news flow and de-risking their portfolios.
While we counsel our clients risk attitudes based on their individual financial constraints and goals, one tenet of successful wealth management is to plan more than one reacts. Our continued planning has resulted in the allocations currently in our clients’ portfolios and has been responsible for the results our clients are enjoying today.
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