Jeff’s Weekly Market Commentary: Waiting Out The Storm
I’m Jeff and this is my Weekly Market Commentary for May 18, 2016.
I am 51 years old and for most of my life I haven’t really had any hobbies. Over the last year, though, I have discovered that I really enjoy sailing. The power of the wind is incredible and the thought that sails can be used to harness that wind and transfer the energy into forward propulsion seems almost magical.
One big difference riding in a sailboat versus a motorboat is that sailboats lean over as the sails catch the wind. This is known as ‘keeling’. Initially, it feels quite dangerous as the boat starts to roll to the side 45 degrees!
It is very unnerving for a lot of people—like my wife! She prefers keeping her feet firmly planted on terra firma. Keeling reduces the drag and helps the boat start to skate across the water. Of course the wind doesn’t always stay constant so the degree of keeling keeps changing.
I sail on the lake as opposed to the open ocean. In the ocean the wind tends to remain more constant whereas it can be much more variable on a lake. For instance, the wind on the lake may be steady at around 10 mph but can gust up to 15 mph. That gust (depending on the angle of attack) can cause a boat that is already keeling and push the sails even further toward the water.
I’ll attach a video where I’m sailing with someone much more experienced than I and you’ll see what happens in the sails during a gust. See the video here.
Actually, it is a miracle that I am able to sail. For 40 years of my life I have had debilitating allergies that kept me from being outside at any time of the year. I also battled depression and had very low energy.
I will be happy to share with you more of the details, but a missionary friend prayed a simple prayer and asked Him to heal me. I never felt anything and others had prayed for me in the past, but this time was different.
Normally, I would have a massive headache if I was 2 hours late taking my medication. I decided to hold off taking the medication that day—and no headache. The same thing happened the next day—no headache.
About a week later I went back to the allergist and I was no longer reacting to the shots I had been doing for several years. That was November of 2013 and I haven’t had any medication since then. There’re no allergic symptoms and my depression is gone! I am a new man with more energy at 51 than I had at 30!
Well, I feel like I’ve been rambling so let me say something about the markets.
As you know, I’ve continued to have my clients positioned in US Treasury bonds and/or defensive positions that do well in a slowing economy like utilities and/or municipal bonds. The stock market has been rebounding over the last six weeks or so and many of the financial networks are declaring that a new uptrend has started. But the economic reality tells a very different story. Growth continues to slow.
So the question is whether we hold our present course or do we change our heading and move a significant portion of the accounts back into the stock market? Using a sailboat analogy has the wind shifted direction or, instead, are we just feeling the effect of a gust?
Until we start to see underlying economic growth strengthening in rate of change terms, I expect to maintain the current heading. The goal during these times is to hang on to your treasure and try to pick up some dividends/growth as we can. At the risk of a mixed metaphor, there are times when the potential for a storm is such that a sailboat needs to head into a safe harbor and wait for the storm to pass. That’s my goal right now—we moved out of equities near the high so that we can focus on preserving that wealth so we can then buy back into equities after the storm passes through—and hopefully at much lower prices!
In the meantime, US Treasury bonds continue to out-perform the S&P 500 on both a year-to-date and 1-year basis. Look at this year-to-date chart of the S&P 500 versus the EDV 30-year US Treasury ETF:
The S&P 500 is up less than 1% after five and a half months in 2016. The EDV 30-year US Treasury ETF is up 13.51%. It is interesting to note that year-to-date the value of EDV has remained higher than the S&P 500 the entire time.
Here is the same chart for the trailing 1-year period:
The S&P 500 over the trailing 12 months is down 2.54% whereas EDV is up 9.13%.
Granted, my clients are not up that much year-to-date because I didn’t put all of their money into EDV. Since EDV is based on a 30-year US Treasury bond it will fluctuate much more than a shorter-term US Treasury bond. Since the vast majority of my clients are retired, stability is important to them. So I have diversified the US Treasury bond durations with 3-7 year (symbol IEI), 7-10 years (symbol IEF), 20-years (symbol TLT) and 30+ years (symbol EDV).
In some accounts I have also added some short positions that make money if the underlying market index goes down in value. These positions have seen some losses because of the recent wind gusts (stock market going up) but I have maintained those positions because I believe it is temporary.
Overall, the goal of protecting their wealth and earning a positive return has generally been achieved year-to-date. That may not sound like much, but recently I heard a statistic that only 6% of large cap funds are positive year-to-date! And with several of the major indexes moving back into correction territory, this position seems appropriate. Sometimes slow and steady does win the race…
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