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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 threat of a reduction in the Fed’s purchase of Treasuries sent yields higher starting in May. Although the reaction may have been overdone, it’s very probable that after rates stabilize they will continue to ease higher over the next 12 months. Municipal bonds were also hit hard in
June, though the performance was tied to record outflows from bond funds. There was no fundamental change for municipalities. In fact, for which the most part, municipalities seem to be on stronger financial ground. For high-tax earners, an opportunity may be presenting itself fairly soon. While we still like emerging market debt for the long-term, it was among the hardest hit as China’s slowdown fears have increased into July. With inflation expectations so low, we would avoid TIPs at the moment. We continue to favor managers that have a multi-sector approach that allows for flexibility as volatility remains high.
Enhanced-Yield Strategies - As most bonds had negative performance with rates spiking, other high- yielding assets such as high-yield corporate bonds, REITs, utility stocks, and MLPs also dropped in value. Similar to our position on bonds, as most investors were unable to predict the quick reversal, we would not recommend selling now, but more likely wait for a buying opportunity after things stabilize. We believe some of these same areas may become opportunities later this summer.
We continue to favor mid-size private debt transactions as bank lending is still very hard to find. We continue to seek deals with low to mid-teen returns backed by strong collateral through the private investment groups we work with.
Stocks - Overall, the Eurozone continues to spiral deeper into recession. The recent crisis in Portugal has not made many headlines but still shows the significant risks that are alive and well. Contrary to our former outlook, emerging markets continue to lag this year. That has still left the U.S. the darling of the investment world. We currently recommend tactical strategies for equity exposure. For any long-only exposure, investors must be willing to ride out the downturn unless the investor is 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. It is uncanny how a “buy the dip” strategy has continued to work for over four years now. It was once again successful at the end of June as July has rallied to new highs. The Fed’s promise of a highly accommodative policy continues to provide that backstop.
Real Estate - The multi-family housing sector continues to see investor money come in to acquire assets. 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 has several properties in escrow, on the market, and will place others on the market later this summer. Omninet, another manager acquiring commercial properties, continues to be
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.