I have the privilege of writing this post on July 1 – the midway point for the year. I actually felt chills up my spine last week when I realized that we’re already closer to the next holiday shopping season than the last one. Fortunately for those of us in the US, the halfway point coincides with a long holiday weekend that can be a good chance to take a break, step back, and take stock of where we’ve been and what might be coming next. In my role as investment manager I am acutely aware of market and economic milestones that mark the passage of the year. Perhaps that is why the close of the first half of 2014 seemed to sneak up on me more than in recent years, because much of this year has so far been marked by….a lack of major events in the markets.
After 2013 brought historic gains to US equities, many observers predicted that 2014 would be a much bumpier ride, and would likely bring about a market correction of 10% or more. Legacy Trust entered the year feeling generally optimistic about the state of the US economy and believing modest equity gains were likely, although we too felt that a short-term market selloff was overdue and would not necessarily endanger our longer term outlook. We also felt that interest rates were likely to edge higher as they had started to do in 2013, given the strengthening economy and the policy changes enacted by the Federal Reserve. Such a move would cause core bond values to fall.
Instead investors have experienced the opposite. The CBOE Volatility Index (VIX) hit a seven-year low in June, and virtually all major financial market segments including global equities, bonds, and commodities have posted gains in the first half of the year. As you might expect, it is highly unusual for all of those asset classes to rally at the same time, since stocks and commodities generally post gains during stronger economic conditions while bonds typically gain during times of heightened uncertainty or economic weakness. While we are certainly not going to complain about participating in market gains wherever they may come from, we are concerned that this trend is not sustainable and that investors need to be prepared for the inevitable change in direction.
Despite the slow and at times painful recovery, we are nevertheless more than five years past the market and economic bottom. I much prefer the environment that we are in today to the gut wrenching market swings we experienced in 2007-2009, but I am concerned that five years of a bull market may be creating a sense of complacency when it comes to investment risk. I encourage all investors to use this halfway point to reevaluate their strategies, and to work with their advisors in positioning portfolios for what is likely to be coming in the future, rather than what we’ve experienced in the past.