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Portfolio strategy update CURRENT MARKET NEWS
Editor’s Note: The following portfolio update is from David Gottstein’s monthly Dynamic Research Group’s newsletter. It was compiled in early March. The Big Mo The S.S. American seems to be steaming through a storm of external forces with enough tonnage and direction to keep her afloat and on a course of job growth and prosperity.
Russia is still a mess, Japan can hope for sluggish growth, Brazil could take a major step back towards poverty and China, in contrast to their prognostications, may be forced to devalue its currency, which could throw all of Southeast Asia back into a tailspin.
Can the combined growth of the United States, Canada, South Korea, Great Britain and the European Union be enough to keep this world afloat?
So far it appears so. What isn’t clear is whether we can weather a storm severe enough to force us to confront all of our demons at once.
It is clear that the amount of liquidity, capital, and wealth built up during the last generation is substantial enough to underwrite and absorb major losses, with just a blip on the radar screen.
The U.S. economy seems to be in a sweet spot where we have attained peak production capabilities and are enhancing those production improvements at an even faster rate. This allows us to absorb displaced workers relatively quickly into more productive work assignments. Ergo continued low unemployment. And continued low inflation. This is the result of low commodity prices and high efficiencies.
This great American economic engine has built up such a head of steam that there is almost no stopping it.
Are we in a wild financial bubble?
If earnings start to fall and interest rates continue to rise, we will see fair valuations fall in the markets.
Inflation is not in sight, and aggregate earnings have come in moderately well against last quarter and last year.
This suggests neither is in the offing. Foreign troubles are potentially the source of capital stampedes. We should be watchful of their impact on domestic demand for dollar traded assets. THE WORLD ACCORDING TO DRG Lean into it
We have decided to increase our asset allocation to 87.5 percent invested, 12.5 percent in money market funds. Although perils exist, as they always do, we see less risk relative to potential gains than has been true for the last year or so.
If bond rates stay above 5.5 percent and head towards 6 percent (a sign of liquidity strains), we may change our opinion.
Housing starts are robust, incomes rising, employment high, the government is borrowing less money on a current account basis and auto sales and profits are still doing nicely.
The market may take a 5-10 percent correction, giving us an opportunity to increase our asset allocation again, but we believe the bull market is intact, until either earnings or interest rates begin to falter on a sustained basis. We will keep you posted.
Good luck this month!
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