While the media continues to remind the public of all the problems that still exist, the S&P 500 index has rallied over 35% from the low it set back on March 6th. Sadly, many people who bailed out of the stock market in early 2009 are still sitting in cash not knowing when it will be safe to begin investing again.
While the media continues to remind the public of all the problems that still exist, the S&P 500 index has rallied over 35% from the low it set back on March 6th. Sadly, many people who bailed out of the stock market in early 2009 are still sitting in cash not knowing when it will be safe to begin investing again. What history continues to demonstrate is that the stock market volatility, both on the upside and downside, can be extreme and is impossible to predict. By staying invested, albeit more conservatively than a year ago, you benefited from the recovery.
As I discussed in the last Deep Rooted Thoughts, double-digit recoveries from recessionary periods are to be expected. We cannot know if the bottom was reached in March or if a new bottom is lurking in the weeks or months ahead. However, with the stock markets rebounding by over 35% from the lows in early March, the rampant fear that we were heading for another Great Depression seems to have dissipated.
By replacing consumer spending which slowed significantly, the government stimulus that was implemented kept our economy viable. As consumers re-emerge and investors re-enter the markets, the economy and the markets will thrive once again. Given that there was an unprecedented amount of wealth held in cash at the end of 2008, the opportunity for big rebounds in the economy and the markets exists. I am not convinced that all the money that was being horded will be redeployed, but I have every expectation that in combination with the stimulus, there will be enough money put to work in 2009 that the markets will finish the year higher than they are now and the economy will begin posting much better numbers by year-end.
In planning for the future, my biggest concern for many clients is inflation. It has been well managed by the government for over two decades, but the current recession and stimulus response are posing some new issues for our policy makers that they have not faced previously. Every indication has been given that they will not pull back the reins on the stimulus until they are convinced that the economy is back on solid footing. This approach virtually guarantees that we will see higher inflation in the next six to twelve months.
I do not anticipate a repeat of the runaway inflation we experienced in the late 1970’s, but we should expect to see higher prices across the board in 2010. For clients who are living off of their portfolios, it is critical to manage against the risks of rising inflation.
While stocks have historically been respected as an inflation hedge due to their long-term rates of return that exceed the inflation rate, more recent studies including those by Alexander Attie and Shaun Roache, two economists at the International Monetary Fund, and Dr. Zvi Bodie at Boston University suggest two other asset classes are more appropriate inflation hedges. The two investments they recommend are commodities and inflation-protected bonds. While client portfolios will continue to hold stocks and bonds, I have been proactively building commodity allocations for clients and converting some existing bond holdings to inflation-protected securities. At a minimum, portfolios will benefit from the added diversification. If inflation arrives sooner than expected, portfolios will be insulated. If inflation is managed perfectly and is held below 2%, these new investments are expected to produce positive returns, albeit lower than if inflation increases are more significant.
I believe client portfolios are well positioned for the remainder of 2009 and they will be monitored closely to ensure that the market recovery does not increase risk levels in client accounts above approved ranges. Market momentum has been abundant in the recent recovery in April and May, but allowing greed to replace prudence in wealth management is a how large portfolio losses can occur. Rebalancing will be done with discipline along the guidelines established by each client’s investment policy, and costs and taxes will continue to be factors that are considered when making portfolio modifications.
Oak Wealth Advisors is very proud of the wealth management strategies that we have successfully implemented with clients. The trust and confidence our clients have in us is gratifying and seeing them achieve their financial objectives and live their lives to the fullest brings us great joy.
This update is intended for the use of Oak Wealth Advisors LLC clients. This update should not be viewed as personalized investment or financial planning advice from Oak Wealth Advisors LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to their individual situation, they are encouraged to consult Oak Wealth Advisors LLC. Past performance does not guarantee future results and all investments should be scrutinized before being implemented in a portfolio.