“In the Land of the Blind, the One-Eyed Man is King”
Over the past six months, investors have heard a great deal of noise. Think of all the issues: the Trump effect, the Brexit, oil weakness and recovery, lack of earnings growth, jobs, and of course, the Fed. And during this period markets have experienced bouts of extreme volatility, yet the S&P 500 is now within 1.5% of an all-time high.
Last Friday, the jobs data disappointed and the punditry was out in full force, even forecasting a “mild recession.” Yet, many of those pundits did not mention the recent end to the Verizon strike and the fact that the employment data has a margin of error of +/- 100k. Lost in the “weak” data was the fact that we experienced the 68th consecutive month of job gains, the longest in history by 20 months.
Let us take a look at some other market data. Despite the early January swoon in the high yield market, the high yield index is now only .5% away from a new all-time high. The NYSE registered 355 new 52- week highs on June 6th, the most since October 2014.
Because of the noise, we forget that diversification is essential. Known as the only free lunch on Wall Street, diversification among asset classes and strategies provides investors with a plan to invest during bouts of uncertainty and volatility. Since 2011, being diversified has negatively impacted returns on a U.S. centric portfolio. Nevertheless, we are now seeing signs that the tide is changing. Consider the following:
- Russell 2000 is up nearly 6% this quarter compared to a 3% return for the S&P;
- Emerging markets up 2% since June 1st, over 4% YTD;
-Lumber relative to Gold remains in an uptrend which historically bodes well for small cap;
As a result, all those who have chased large-cap outperformance might not see a huge impact on their portfolios over the next few months. Yet, those who reposition and remain allocated to a diversified, globally allocated portfolio could finally be rewarded.
Stephen E. Johnson, JD, CFP®, CPWA®
Portfolio Manager, Fundamental Analyst
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