Eye on Wall Street: Stocks hit new highs to close year


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The S&P 500 rallied another 3.1 percent in November bringing its year to date gains to an astonishing 29.1 percent. If we hold these gains in December (seasonally the best month for stocks, by the way) 2013 will be the best year since the good old dotcom days of 1997.

REITs on the other hand took a licking last month, declining 5.2 percent in November. They are now up only 2.2 percent year to date. These commercial property stocks had been overvalued as a higher yielding bond proxy and could not withstand the summer spike in interest rates and recent turbulence.

Interest rates rose across the curve last month, except for the short end where money markets are anchored close to zero by the Federal Reserve. Short rates look to be very low for several more years. The 10-year Treasury ended November at 2.74 percent, up 20 basis points (bps) for the month and over 100 bps from its May low of 1.63 percent.

Foreign equity markets were flattish in November, but the developed country EAFE index is still up 21 percent year to date while emerging markets are down 1.2 percent.

Commodities continued to languish losing 0.8 percent in November, bringing the year to date losses to 10.6 percent as measured by the Dow Jones—UBS Commodity Index. WTI oil was down again for the third month in a row, settling in at $92 per barrel. The U.S. is pumping oil at the fastest rate in 25 years. To most traders demand just does not seem strong enough to neutralize the significant rise in production.

Swing, you bum!  

“The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’”   

Warren Buffett’s admonition about the stock market applies to other asset classes as well, not just stocks. There is a message for investors. Stick to your long run strategy. Tune out the everyday noise. Be patient.

Market timing – jumping in and out of the market – based on macroeconomics or technical trends or whatever, is very difficult. I don’t think it works.

There are people out there who will tell you different. They trade up a storm to show that they are “doing something” to earn their high fees. They claim to be able to “keep you safe” while earning market returns. No track records are provided! These are not strategies or a philosophy but rather a sales pitch.

Study after study shows that hyperactivity and market timing doesn’t work. Recently the NY Times reported on work by Dalbar that shows: “Over the last 20 years the average return of all investors in U.S. stock mutual funds was 4.25 percent per year. Over the same time period, the benchmark S&P 500 provided an annualized return of 8.21 percent.”

Dalbar attributes part of the whopping 4 percent difference (per year for 20 years) to fund fees and expenses and “the fact that the average mutual fund doesn’t beat the market, as many studies have shown.” But the rest is due to the fact that “investors move their money in and out of the market at the wrong time.” 

That data is for individual investors but the same holds true for institutional investors. In Endowment Management: A Practical Guide author Jay Yoder notes that: “Many investment committees spend far too much time on activities that often subtract value — such as manager selection and market timing — and not enough time on establishing and adhering to their asset-allocation targets, where their efforts could really add value.”

He goes on to state:  “For most institutions, the allowable ranges or variation from target should be relatively narrow. A policy that states U.S. equities will be 50 percent of the portfolio, plus or minus 25 percent, is of little value. One often hears this opposing argument: ‘We need to build flexibility into the guidelines so that we can respond appropriately to market conditions.’ Unfortunately, history shows that most market-driven responses are made at the wrong time in exactly the wrong direction. Narrow asset-allocation ranges allow the flexibility to make small bets or tactical tilts, while protecting the investment policy and the endowment from the pressure to abandon sound, long-term strategy in the face of short-term adversity.”

Moral of the story? Spend a lot of time up front on goals and risk tolerance. Get that initial portfolio right. And then sit back and enjoy the game!

Jeff Pantages, CFA, is the chief investment officer for Alaska Permanent Capital Management, a $2.4 billion investment management and advisory firm located Anchorage.

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