Five In A Row – Foy Financial Services, Inc.

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

March has been quite kind to equity markets. All of the major market indexes that we follow have gained ground this month. This may come as a bit of a surprise to people who only listen to the nightly news. How can equity markets be rising when there is so much going wrong in the world? Because for the most part, equity investors are not terribly interested in negative news. Equity investors are more concerned with future potential. For equity investors, bad news quickly becomes another bug smear on the windshield. Bond investors are more interested in the current math than the future potential. With the Federal Reserve forecasting rate cuts, the math gets very interesting for bonds.

The best news is how broad the equity market rally has become. Large cap equities are back in the lead, closely followed by mid cap equities, with small caps trailing far behind but still in positive territory. From a sector perspective, we are also seeing broad participation. This creates a ‘target-rich’ environment for equity investors looking for opportunities. The best sector performances in March have been in internet, financials, technology and energy. The lowest sector performances in March have been in utilities and real estate. For the year, the strongest performances have been seen in energy and information technology. The weakest performances have been in the real estate sectors, with the Dow Jones US Real Estate Index down -1.89% and the S&P US REIT Index down -1.30%.

With two trading days remaining in the month of March, the S&P 500 Index is now on track for its fifth consecutive positive month in a row. A “glass-half-empty, glass-half-full” analysis can be a good reflector of what kind of investor a person is, from a temperament perspective. The glass-half empty perspective may be saying, “It can’t go up forever and it’s already been running for five months. Surely the S&P 500 Index is due to take a breather.” The glass-half full perspective might be thinking, “It’s still a Bull Market and the herd is on the move. I don’t want to miss out on this!” And both of these viewpoints may be correct.

Equity markets largely function from a glass-half full perspective. What is it selling for now? How much more could it be selling for? Equity investors hope to profit from the difference. Judging from equity market prices over the last seventy-five years, equity investors have generally done pretty well, some better than others. Equity markets are driven by expectations. Bond markets largely function from a glass-half empty perspective. What is the current interest rate? What could possibly go wrong? Bond investors have also done alright over the years, some better than others.

Right now, we can appreciate both perspectives, with the main question being when? We are currently maintaining asset allocations that have additional bond allocations. We are also invested in equity sectors traditionally associated with a high potential for growth. This may be likened as a ‘bar bell’ asset allocation to current market sectors. It reduces the risks of being fully invested in one approach versus another. The reality is that both scenarios may take place, though not simultaneously. This barbell approach reduces the timing risk, even though it also reduces the potential for ultra-high performance.

The end of March and first of April is a major quarterly rebalancing period for equity markets. The impact on markets can be seen when the market laggards experience surprise rallies, like yesterday’s, while the past over performers see some profit-taking. Portfolio rebalancing is an important part of asset allocation and the quarterly occurrences do have an added advantage of ‘resetting the table.’ The rebalancing process rarely has a negative effect on long-term trends and may even serve to reinforce the dominant market trends. On a quarterly basis, however, portfolio rebalancing is considered to have positive benefits. Five in a row is pretty impressive. Bull markets are famous for rallies such as these.

Edward D. Foy, Manager, SELECTOR^® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

Sources: StockCharts, Morningstar, Stock Trader’s Almanac.