Q4 Rebalance is on the Way

The changes are reflecting what you already know:

• Markets have increased in price
• Valuations are above the mean
• Bond yields remain compressed
• Volatility remains discounted

Much of what was predicted in January has failed to materialize.  The Chinese economy, despite the dire warnings, will move forward at a measured pace under the control of the state.  And if you’ve been on the sidelines during this rally, you should hang your head and cry.  This rally, which is very old, is quickly becoming notable.  Unpredictable, yes, but also consistent in the way markets behave.

The changes to our new models are as expected.  Price earnings ratios of our funds are up and look extended.  Dividend yields are down.  And after my discussion with Jim Kaffen of Sortino Investment Advisors, I’ve learned that very few of the asset classes are showing much upside potential in excess of their benchmarked alpha. But, this is what markets do. The quarter-to-quarter neurosis manifested in the warnings of impending doom is only noise.  Do not listen to the noise.  Mainstream investors who have not participated in the equity (or bond) markets over the past few years have missed opportunities to change their lifestyle.  Our investing philosophy is based on the data and not the noise.  Our occasional changes are only reflecting what the evidence is telling us and not on trying to predict the next pullback or rally.  We remain consistent and disciplined in our decisions.  And yes, our investment rationale is well grounded.

Emotions run high in markets, and at some juncture in the future the noise will rule the day.  Irrational behavior will run amuck.  And you, as an advisor charged with being a good steward and fiduciary, will have an opportunity to bring reason back to the way your clients are thinking. Market corrections and economic shocks will always occur, many times without warning.  Try not to get surprised.