One of the things that I certainly didn't miss while in Europe was the constant lying during every commercial break, otherwise known as campaign season (which seems to last about 18 months of every year). It only took a few hours to snap me back to the reality of just how distasteful our political process is, it simply reeks.
Fortunately Congress is now in recess for five weeks. Yeah, yeah, I know they have a lot of work they should be doing, but honestly the world seems to revolve just fine when they're gone. Actually the world of stocks simply loves it when Congress is not in session. One of the most interesting stock market anomalies is called the "Congressional Effect", which is the tendency of stocks to fall when Congress is in session and to rally when they are on holiday. One academic study examined the Dow's performance from 1897 through 2004, and found that more than 90% of the market's capital gains occurred when Congress was not in session. The Dow returned 5.4% on an annualized basis when Congress was in recess, but only gained o.4% annually when they were in session.
Another more recent study looked at the 46 years from 1965 through 2011 and found that the S&P 500 gained 16.6% annualized during periods when Congress was adjourned versus a o.7% annual gain when Congress was in session. Of course this may just be some weird statistical fluke, but it also might be based in the reality that investors consider Congress to be more of a hindrance to the economy than a benefit. Either way, lets enjoy the next five weeks while we can.
Don't Fight The Fed - Fed President Calls for Open-Ended Bond Buying
Another bullish interview happened this week with Erik Rosengren, president of the Federal Reserve Bank of Boston (a non-voting member of the Fed), called on the Fed to launch an open-ended bond buying program that would continue until the economy grows and unemployment falls. Mr. Rosengren is part of a group of Fed officials who believe that even though the Feds stimulative efforts haven't led to economic growth or lower unemployment, the reason is simply because they haven't done enough. Of course there's another school of thought (one that I attend) that believes the reason the Fed's stimulative efforts have been ineffective is because economic participants realize that these efforts just lead to larger deficits and a more prolonged recession. Never-mind, the fact that the Fed is floating trial balloons about "open-ended" bond buying is seen by the market as another sugar fix. Don't fight the Fed, and don't fight the worlds central banks.
Also, Don't Fight The Tape
While volumes have been light, the markets have continued to subtly work their way higher. The S&P 500 is up 10.77% through July. Strangely, commodities and Treasuries were both up more than 5% in the month of July. This gradual move higher in risk assets has caused us to lower our cash holdings from 40% to 23%. We increased our weight in US Equities, International REITs, Commodities, High Yield Bonds, MLPs, and Emerging Market Debt.
Here's where we stand today in our Global Tactical Asset Allocation Portfolios:
US Equities -- 25% Bullish,
The US equity markets are still in a trading range, but sentiment has moved into bullish territory.
Int'l Equities -- 3% Bearish,
while improving, both developed and emerging equity markets are still in bearish territories. We remain at our minimal weight.
US REITs -- 6%
Bullish, we are still at our full US REIT target of 6%, but they are showing some early signs of weakness as investors get more aggressive.
Int'l REITs -- 4% Bullish, international REITs have moved decisively into bullish territory.
Gold -- 5% Bearish, Gold remains in bearish territory. Gold's trading range has been very narrow, but also fairly volatile.
Commodities -- 6% Neutral, Strength in grains and oil have led to an improvement in commodity indicators.
US Fixed Income -- 25% Bullish, US Treasuries continue to be near record low yields. High-yield bonds & MLP's have moved into bullish territory.
Int'l Fixed Income -- 3% Neutral, Emerging market bonds have improved along with other risk assets.
Cash Equivalents & Currencies -- 23%, cash levels have increased dramatically, and are divided between the US at 21%, and 2% in China.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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