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companies because it will lower reported revenues from foreign countries. This one ties right into the comments on the first bullet point above.
Investment Outlook and Strategy:
Using the above as our backdrop, below are a few thoughts on different asset classes that affect our current allocation strategies. In the current environment there are headwinds as well as potential catalysts we feel could improve the economy. We continue to maintain a diversified investment strategy that attempts to protect portfolios against the known and unknown risks facing investors.
Bonds - The upside of bonds has decreased substantially. How much lower can rates go, right? However, we still believe in most regards that it’s useless to fight the Fed. The “Great Rotation” of money moving from bonds to equities that was trumpeted in at the beginning of the year simply has not happened. The record inflows into equities did not rotate out of bonds, but came from savings accounts. Bonds have continued to see increased demand even as stocks move up. Although some bond funds have seen negative returns this year, the volatility has remained quite subdued. In this environment, we continue to see advantages of using managers which have the ability to go where the opportunities are in fixed income.
Enhanced-Yield Strategies - Yields on many income-producing investments including utilities, high-yield bonds, MLPs and REITs have decreased as values have soared from investor demand. We see high-yield bonds as a good diversifier to stocks in the current environment. We also believe this is a great opportunity in the private market as bank lending is still tough to access. We continue to work with Keystone and even real estate groups whose strategies are to replace banks that are no longer willing to lend. With opportunities of strong cash
flow backed by great collateral, we feel this is a great risk/reward investment.
Stocks - Overall, the Eurozone continues to be in a period of negative growth. Contrary to our former outlook, emerging markets have also lagged this year after a strong 2012. That has left the U.S. the darling of the investment world. Recent European events above barely affected the U.S. markets which quickly moved on. This next quarter could be a catalyst for moving markets higher or a short-term correction if companies show weakening results and cuts in future earnings. The payroll tax hike which was feared would cut into consumer spending has had no significant impact so far. Companies continue to be very healthy with lots of cash, but investors are now focusing on revenue growth rather than just a strong balance sheet. We now recommend tactical strategies for equity exposure. For any long-only exposure, an investor must be willing to ride out the downturn unless he’s willing to call a top and a bottom. Any market correction could be short lived with a Fed Board ready and eager to assist by printing more money.
Real Estate - As we’ve stated before, the multi-family housing sector saw a lot of investor money come in to acquire assets last year. This has placed Virtu, one of our managers, in a very good position as it acquired most of its properties at least two years ago. Virtu currently has six properties for sale set to close in the second quarter. Omninet, another manager, which is acquiring commercial properties, expects to be active during the second and third quarters. We still think certain real estate sectors present a good investment opportunity as well as diversification from the stock market. Specifically, we favor commercial opportunities that generate ongoing cash flow. As inflation expectations increase, this asset class could do well if property values increase and rents move upward.
Commodities/Managed Futures - These asset classes continue to be the biggest drag on clients’ portfolios. Another twist to this asset class is the increased stimulus plans from other countries and its effects on the U.S. dollar. This could be a continued headwind for U.S. dollar based commodities. However, we continue to use these asset classes to mitigate the risks of increased inflation expectations and a weakening dollar while the Federal Reserve continues printing money at historic rates.
Disclosures: This commentary is submitted for the general information of Cornerstone Wealth Management, LLC clients and may not be distributed to other individuals. This commentary is not deemed to be investment advice and information contained herein may not be current. An investor should consider the investment objectives, risks, charges, and expenses of each investment carefully before investing. For more complete information, you may contact us at 858-676-1000. Past performance is no guarantee of future results. Individual performance may vary and investment performance numbers may not be audited.