Summer 2015: Mid-Year Update
Reginald A.T. Armstrong • The Armstrong Report
2015 may end up being an interesting year, but so far it has been pretty boring in the markets. In fact through early June, the US markets had the narrowest range in terms of percentage moves in several decades.
The economy is a mixed bag. The first quarter was negative, with US GDP clocking in at a 0.2% decline. The second quarter seems to be on track for a mild 2% gain. On a brighter note, employment numbers have continued to strengthen. My overall assessment of these and many other factors is that the preconditions for a recession have developed, but most likely we are simply having a slow-down.
The US stock market bull is looking exhausted. Stock leadership is looking very narrow. For example, through 6/19/15 while the NASDAQ index is up over 17% in the last 12 months, NYSE (New York Stock Exchange) index is up less than 1%! (Source: Wall Street Journal) This is reminiscent of the way markets have acted near market tops. As I have said before, US stocks are very expensive here. International stocks may appear more reasonable, but not really cheap. Bonds are also expensive. Energy shares, natural resources, and commodities, however, may appear more reasonable. For three of the past four years investors have been punished for their diversification. Only a US concentrated portfolio has done very well. The lesson to draw here is not that one should be US centric, but that you never know which asset class will outperform in any given year or years. Consequently, we still believe that the prudent policy for portfolio construction is broad and deep diversification. It potentially reduces risk and can also potentially increase return, even if it hasn't recently.