October was a losing month for the stock market and, as expected, my portfolio was not down as much as the stock market averages. During the month of October, the Market Comparables model was down -0.5% (net of fees) vs. -2.2% for the S&P 500 Index (SPX). I have been taking a very risk-averse stance so my portfolio doesn’t move as much as the market – either up or down.
I continue to follow my stock market allocation model as presented on my web site (theastuteinvestor.com) and that model has been calling for only a small exposure to equities. The primary problem has been in the area of sentiment although that factor has been improving modestly.
Basically, for most of this year, small investors and speculators have been very bullish and have been willing to accept substantial risks primarily, I think, because they expect the Federal Reserve to flood the economy with enough money to allow continued, if moderate, growth.
I prefer to be very cautious about the government’s ability to help the economy directly because there are potential negative side effects for all of their actions.
Earnings are extremely important as drivers of stock prices and earnings have been essentially flat for one year at this point. I have serious concerns about the ability of S&P 500 earnings to increase over the next year. In my opinion, it is much more likely reductions in estimates may lead to weakness in stock prices.
Stock valuations seems fair given the earnings expected and technical factors are currently neutral. I currently have only a small allocation to the equity market and I don’t expect much change to that position unless stock prices decline or the earnings outlook stabilizes.
I am using various ETFs to achieve my stock market exposure and I currently like the SPDR DJ International Real Estate ETF (RWX), an international real estate fund. In my opinion, this ETF is the strongest of those I currently follow and it provides exposure to an asset class that seems to be doing better over the last several months.
Performance discussed is net of advisory fees. The investments discussed are held in client accounts as of October 31. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Any index comparisons provided in the blogs are for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factors.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
