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Special Market Commentary
Predicting the Weather
As we often make our assumptions about the weather from news meteorologists and by our observations outside the window, we are sometimes left with a bit of confusion and uncertainty. Even the best meteorologists fall short in predicting clear skies, rain, or even severe thunderstorms. As our home office in Pittsburgh provides sunny mornings and high temperatures, we are taught that this can change by afternoon faster than the Pirates starting lineup. Sometimes, carrying an umbrella makes sense regardless of the current weather condition.
Rainstorm
Despite conflicting reports, we determined that the storm cloud in the form of market volatility and European difficulties was not to pass without rain. As we previously discussed our concerns with European sovereign debt, persistently high unemployment, and the reluctance of the American consumer to spend again, we began to carry an umbrella during what appeared to be sunny mornings. As the rain came upon us in the form of the Greek debt crisis and an aversion to risk by investors, our umbrella helped protect us from the storm. Our defensive posture served to mitigate risk. In hindsight, it proved prescient for the current market events and how they unfolded.
The Umbrella
The umbrella, so to speak, came in the form of defensive investment positioning within the portfolios. Through portfolio adjustments in November and March, and a third recently this past week, we made the following timely changes: -
Increasing the weight to hedged-type strategies
- Reducing the high-beta* international exposure with defensive international funds and increasing cash.
- Reducing high-beta* financial stocks
- Increasing cash from commodity positions
- Increasing cash from maturing customized structures
The annoyance of carrying an umbrella proved to be worthy for uncertain times. These strategies are a product of our independent approach that we take to developing a portfolio. Rather than limiting clients to a static risk designation (i.e. 60% equities and 40% bonds), we continuously seek to minimize the amount of risk a client must assume by hedging against volatility in order to pursue their overall goals.
Forecast
While we cannot distinguish between short-term market changes, we do feel it is prudent to be defensive until the storm clouds pass. We will continue to evaluate market conditions for defensive and opportunistic positioning. There will come a time when we will put the umbrella away based on expectations of future economic growth and market stability. Until then, we remain defensive and long term optimistic. Your continued confidence in our group helps us succeed in your long-term financial goals.
*Beta: Measures a portfolio’s volatility relative to its benchmark. A beta greater than 1 suggests the portfolio has historically been more volatile than its benchmark. A beta less than 1 suggests the portfolio has historically been less volatile than its benchmark.
There is no assurance that these techniques are suitable for all investors or will yield positive outcomes. No strategy assures success or protects against loss.
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