As always, we begin with a brief reminder of our guidance thus far for the year. In our 2011 Year End Review, which you can always revisit at the Communications section of our web site, it appears we got it largely right. Going into 2012, we provided a rather cautious view of the equity markets, and in early February we laid out scenarios in which the market could reach 14,000 by year end. The markets have been slowly rising, but the risk of a meltdown continues to be evident.
As Warren Buffet says, “Investing is simple, but it is not easy.” We continue to believe the guidance we gave for 2012 remains in effect and it is STILL time to be somewhat cautious. Sometimes this is difficult advice to follow as the market “melts up” around us. But European debt problems, the slowing economy in China, even the continued jobs market in the U.S. look to be ongoing problems. Seasonal factors contributed greatly to the decent jobs report for the U.S. in late July, but it was still only decent. We highly anticipate a decline in GDP for the U.S. over the last half of the year (ISM, retail sales, other early indicators are negative). Adding in the election year and potential Washington stalemate until then (think “Fiscal Cliff”), we just do not see a catalyst for improvement and the “bullish” case for equities, yet.
IAP’s resident technician, our partner Grady, continues to see some optimism in the short run, and has been bullish over the most recent months (also refer to his blog on our web site). From this technical perch, the noted melt up will continue to provide its own momentum. The very low interest rate environment, the dearth of cash into equities and reasonable earnings will all help the markets climb higher. Grady believes, and has for some time, that the S&P can claw to 1,450 or higher in 2012. But even Grady keeps a short term view of this; technicals, so far, would suggest the eventual move in equities could come to an end later this year or most likely mid to late 2013. The technical view for 2013 is very much in line with IAP’s macroeconomic assessment; a worldwide economic recovery is not likely in 2013. The discipline of technical analysis is dependent upon market movement, and Grady follows this closely to determine if direction has changed. If there is significant change to these views, Grady does update that on our blog more regularly.
Even with this level of agita, IAP is not suggesting a significant underweight to equities. There is yield and return out there to get! As at the beginning of the year, income continues as a major theme. Preferreds, MLPs and higher yielding equities are all worthwhile. We are very focused on identifying equities that are shareholder centric, that look to increase dividends, drive share repurchases, and have fortress balance sheets. These tend to be companies focused on beating earnings, even in a declining revenue environment. Cost control, prudent investments, and longer term views are very important in this selection process. There are some very strong companies, which through strategic divesture of some assets and continued large buy backs, continue to elevate in share price.
For the reverse side of this equation, as we do approach Grady’s 1,450, it could be time to lighten up on equities with more perceived market risk.
Our standard words of caution will continue to apply over the remainder of 2012 and 2013 – expect volatility to gradually increase. As the markets have performed somewhat consistently with Grady’s technical analysis, we are trending in that direction for equities through selecting quality companies. IAP has developed several model equity portfolios based upon our Client’s risk profile, and we would be happy to share our insights regarding these specific securities. However, the direction of the markets will continue to matter a great deal. It is our opinion that this direction will continue upward for much of 2012.
This represents the opinions of the author as of August 1, 2012, and is subject to change at any time due to market or economic conditions, or other factors. Statistical data derived from third-party sources is believed to be reliable and has not been verified by Indie Asset Partners, LLC. Specific recommendations contained herein may not be suitable for you; please contact us for recommendations specific to your situation.