For the past two years, Dominion Wealth has been gradually reducing the amount of stock exposure in client portfolios. A dramatic reduction in our weighting to equities was completed near the end of 2009 as we saw a sharp rebound off the March market lows. The graph below of the Dow Jones Industrial Average and of the S&P 500 shows that through September 2011 there has been very modest gain aside from dividends. In fact, the picture looks amazingly like a heart-stopping ride one might find at a Six Flags amusement park.
At that time, we judged that the risk of a recurrence of recession and a stock market swoon was larger than the opportunity of solid stock market gains. We were early in our exit from most stocks to a higher proportion of bonds in your portfolio. I know I slept better over the past two years because of this. I hope you have also.
There are interesting things happening in the economic research we follow. One of our most trusted sources is the Consumer Metrics Daily Growth Index. This is a compendium of various economic data that provides an indication of the demand for consumer discretionary durables, i.e. automobiles, washing machines, technological devices. On occasion, it has also shown to be a fairly reliable indicator of the direction that our Gross Domestic Growth (GDP) will head. Most recently we have witnessed this metric shoot up dramatically from -7 to + 7 in the last three months after taking 20 months to grind down from +7. (FYI, the Great Recession of 2008 took 3 months to bottom at -6 and one year to peak out at +6.) Below is the chart. Please see a full description of how to utilize and interpret this data at the end of this communication.
Another trusted source, the Economic Cycle Research Institute (ECRI) predicted the global manufacturing slowdown we are experiencing now back in January. ECRI most recently has said:
“This time too, there is a serious recession threat for the US. At this point, it is not there yet but the danger is real. Whether the slowdown turns in to a recession is something which will be determined over the next few months by the actions taken by the policy makers. It's not yet a lost cause.” (www.businesscycle.com)
To summarize, Consumer Metrics is potentially forecasting an uptick in growth and ECRI is giving indication of a potential slowdown a little further down the road that may be averted/delayed by the actions of our elected officials. Therefore, I believe we have to prepare ourselves and our portfolio action plans for the potential of a big spurt up of growth in the US economy in the short-term. This potential boost in stock values may give us an opportunity to further scale back our exposure. It could be an opportunity to fortify the portfolio in advance of what may be another fall in to recession. Think of it like a squirrel gathering acorns ahead of the winter. The good news here is that we have flexibility and are able to be proactive in our approach to managing your investments.
It is important for you to understand the underlying strengths and weaknesses of the economy. A brief spurt of positive activity will not cure all the ills we face. Our goal is to participate in solid growth based on strong long-term fundamentals. Please remain calm if the markets react very favorably to the news of this potential spurt of growth in GDP. The damage that is already “baked in the cake” from the past two years may still undermine the ability to sustain growth in the short-term. Manufacturing is slowing; Housing is stuck in the mud and unemployment is silently growing. On top of that our government must cut spending or raise taxes to match its income with its expenses. These are not the components of a thriving economy. Home price deflation and a huge excess of inventory will take quite some time to clear the system. Local and federal budget deficits and debt will presumably also take a long time to correct. We are watching our trusted economic datastreams closely. We will gladly begin buying stocks when we feel it is safe or the values are perceived to be bargains.
On another and perhaps more important note, we are available to help other families and businesses who you think would benefit from our proactive style of wealth management. We hope you find this information and insight to our processes valuable and we encourage you to share it with other families or people that you care about. It takes growth of 100% to recover from a 50% decline in the market and after that roller coaster ride you are right back where you started. Buy and hope is not a strategy for success.
Until Next Month,
Your Advisors at Dominion Wealth
*Keeping Perspective: Explanation of Consumer Metrics Daily Growth Index –
“It is very important to remember that our Daily Growth Index (and its precursor Weighted Composite Index) measure year-over-year changes in consumer demand for on-line discretionary durable goods. In other words, the indexes measure the slope of the demand curve, not the actual demand itself. When the indexes first cross in to neutral territory (a reading of 0 for the Daily Growth Index and 100 for the Weighted Composite Index) it only means that the actual "absolute" on-line demand is no longer getting worse -- i.e., it has just reached rock bottom.
By analogy, our indexes measure the slope that a car is experiencing when driving on mountain roads in a fog. Our "car" started down a slope on January 15, 2010. It reached the greatest downward grade on the road over 16 months later in late May 2011. And on August 3, 2011 our "car" reached the bottom of the slope and the forward tilt leveled off. Furthermore, our moving-average mathematics lets us see a few yards ahead in to the fog, and that view indicates that over the very short term we are likely to start climbing out of the deep canyon we have found ourselves in.
"Not getting worse" is good news. But it doesn't mean that we are anywhere near whole again (or that we have climbed anywhere near completely back out of the very deep valley we had driven into)“ - Source: www.consumerindexes.com