Monthly Investment Commentary

It looked early on like May was going to be a good month for stocks, but the market turned sharply lower mid-month and after several volatile swings finished the month with a loss. The S&P 500 was down 2.9% in May, and we saw a shift away from the higher-risk asset classes that had previously put up big numbers. Small-cap stocks dropped 5.6%, emerging-market equities lost 9.3%, international equities declined 4.5%, and even REITs—which are typically viewed as being lower-risk than the broad stock market—lost 2.9%. The big decline in emerging markets flowed through to emerging-markets short-term local-currency bonds, which lost 1.9% for the month. Inflation concerns were on investors’ minds, resulting in a slight loss for the Lehman Aggregate Bond Index, although rising commodity prices (oil in particular) benefited commodity futures, which gained about 1%. It’s far too early to tell whether investors’ risk tolerance is diminishing or if the markets are anticipating a significant worsening of economic fundamentals, but we take some comfort from the fact that valuations for the S&P 500 are somewhere between decent and attractive, and in the past, the worst bear markets usually started from a point of overvaluation. Our investment discipline has also kept us from chasing the “hot” asset classes which may not have that same valuation cushion. We are making no changes to our model portfolios this month.

As of this writing the markets are still expressing concerns over inflation, interest rate increases, oil prices and tropical storms that can threaten the Gulf Coast oil infrastructure. Many economists predict this as a healthy correction that will strengthen the markets resolve to move forward later this year.

For the long-term it is important to focus on one’s investment policy statement which guides us through times of market turbulence.

For the short-term we are constantly assessing market fundamentals and determining if portfolios can be repositioned among asset classes to better protect against risk. Although market volatility is not a welcome event it is reality and is expected. Investors often overreact during these periods. This can cause asset classes to become under or overvalued based on their fundamentals. However, during times such as these it is easier for us to add value to our portfolios through the use of tactical asset allocation.

What is our prediction for the year? Using the thought process of noted investor Warren Buffet, things haven’t changed fundamental much in the past month, but stocks are now on sale for a discounted amount. Applying this approach would suggest that equity markets should rebound handsomely. However, with the risks present in our economy we are not confident in overweighting to equities at this time.

Our portfolios are designed to protect against many possible adverse scenarios in the world economy while still allowing for upside appreciation during periods of market appreciation. Our bond positions present protection in the event of a recessionary environment. Our emerging market bond investments provide protection against a falling dollar. Our international investments provide global economy diversification. Our equity managers have a long proven track record of beating their benchmarks.

We will consider a tactical model allocation at the end of this quarter and review your account for portfolio rebalance based on our computerized portfolio management program.

In the interim thank you for your patience and please do not hesitate to contact us with any questions regarding your portfolio.

— Stapp Financial Planning, PLLC

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