Portfolio Rebalancing Opportunities on the Horizon

The securities markets experienced some volatility in the first quarter of this year, but that’s not always a bad thing. The objective of investing is to buy low and sell high, so if prices continued climbing without a pullback, there would be no ideal time to jump into the market with new money.

Fortunately, one of the benefits of diversification is that the various asset classes do not always move in tandem. When one asset class underperforms, there are others that might be outperforming — if your portfolio is diversified in non-correlated asset classes, this might enable your portfolio to pick up the slack. With that said, the widening of spreads in the credit market in early 2016 appeared to us to be more of a natural transition than a stress factor. We believe that risk assets simply experienced a higher degree of volatility, as they are prone to do from time to time.

However, in our opinion, there have been plenty of indicators of a stronger growing economy and that the securities markets will adapt and benefit. For example, in January the Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Index reported high measures of consumer spending and optimism. Moreover, there continues to be slow but steady growth in wage growth and the job market.1

Opportunities

Over the past year, there has been tremendous focus on low gas prices. Prices remained so low in 2015 that Americans saved an average of $700 per household, according to the Energy Information Administration. As of January 2016, the price of oil was at a 12-year low.2

So where are those extra savings going? Fortunately, when confidence is up, people often start spending and investing money rather than hoarding it. We believe one factor that has helped shield U.S. growth from the type of woes experienced abroad is that our economy is driven more by consumer and domestic-oriented industries, such as services, rather than manufacturing. In fact, two-thirds of U.S. household budgets are now spent on services rather than goods, which is also the sector in which we’ve experienced the highest job growth.3

In 2015, the sectors that produced the highest corporate profits were technology, health care, consumer staples and consumer discretionary. To date, all signs indicate that these sectors will continue their high levels of performance throughout 2016. This may keep our overall economic growth moving forward nicely, even if other sectors falter.

Perks of Volatility

The current economic expansion reached six and a half years in January. The last period of growth that lasted this long was in the 1990s, and that one lasted 10 years. It’s worth noting that during that last economic boon, the equity markets also underwent several periods of volatility, including dips that could be considered a bear market, but the expansion continued unfettered.

Since 1928, the S&P 500 has experienced an average of three corrections per year measuring 5 percent or more and averaged only one pullback of 10 percent or more a year. Better yet, after each 10 percent correction, the S&P 500 recovered within three months and boasted average returns of around 14 percent.4 One interesting thing to note is that although today’s markets seem to be more volatile than in the past, those episodes appear to be both sharper and shorter than they used to be.

Temporary corrections possibly offer an investor the opportunity to rebalance his portfolio and possibly reinvest any gains that may be achieved at better valuations. As we progress through 2016, watch for following indicators that the markets are stabilizing and consult your financial advisor about whether you should consider repositioning assets for potentially increased performance.

  • U.S. corporate earnings become more resilient and demonstrate consistent quarter-over-quarter growth
  • Volatility subsides
  • Earnings grow steadily, driven by the consumer sector
  • Oil prices begin to stabilize, probably mid-year, as the result of cutbacks in major capital spending that will impact supply
  • Market valuations become more attractive
  • Long-term investors start allocating risk capital back into equity markets
  • Investors grow more confident that we will avoid another market setback



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1 Merrill Lynch Wealth Management. Jan 19, 2016. “A Market Under Stress — We Believe This, Too, Shall Pass.” Accessed Feb 3, 2016.
2Merrill Lynch Wealth Managemen. Jan 21, 2016. “A Repricing of Risk Now, A Repricing of Fundamentals Later." Accessed Feb 3, 2016.
3 Merrill Lynch Wealth Management. Jan 19, 2016. “A Market Under Stress — We Believe This, Too, Shall Pass.” Accessed Feb 3, 2016.
4Merrill Lynch Wealth Managemen. Jan 21, 2016. “A Repricing of Risk Now, A Repricing of Fundamentals Later." Accessed Feb 3, 2016.

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