Dara R. Consler, The Daily Record Newswire
This expression, “Risk on or risk off?” refers to how investors feel about and explain market movements. So if they feel optimistic, they will be putting “risk on” by buying riskier investments like stocks and commodities. “Risk off” would indicate investors feel it’s time to lower risk. They would buy low risk assets like bonds or cash and sell stocks.
Is now the time to be putting risk on or taking it off in your portfolio? Now is an important juncture in the stock market and presidential election cycles. For several reasons, we feel now is the time to reduce risk in investment portfolios.
Fundamental
Our economy is weakening. GDP growth was slower in the first nine months of 2012 than in 2011, and 2011 was weaker than 2010. Europe is now in recession and growth is slowing in Asia as well. Third quarter U. S. corporate earnings are likely to be more disappointing than they have been in many, many quarters.
The “fiscal cliff” of income and capital gains tax rates scheduled to increase Jan. 1 and accompanying defense spending cuts have created uncertainty that is holding back investment in our economy. If our politicians do not resolve the fiscal cliff very soon, our economy could go into recession as early as next year or 2014.
Technical
Our stock market is nearing a “triple top” or “head and shoulders” technical pattern. This happens when the market goes up to a high (1980s and 1990s), then down sharply (2000-October, 2002), rises again to a higher high (10/9/07), falls once again (October 2007-March 2009) only to rise a third time (2009 to today) but not to the middle high point. The first and third high points are the shoulders; the middle high is the head. Technicians believe this pattern indicates a trend reversal is at hand, which would be negative for stocks.
Historical
This stock bull market we have enjoyed since March 9, 2009 is getting long in the tooth. It is over 1,300 days old compared to the average of about 750 days for past bull markets. The S&P 500 is up about 125 percent versus the bull market average of 86 percent. The current bull market is the sixth longest and ninth most powerful on record.
In the presidential election cycle of four years, historically, the first year (2013) is the weakest by far for stocks. The average first year return looking back into the late 1800s for the Dow Jones Industrial Average is only 2.0 percent, with historically more than a 50 percent chance that the market will be down. (The third year of the cycle is the best year.)
Barack Obama looks like he’ll be only the eighth president in history to serve a four-year term when stocks appreciated all four years. Since 1883, of the seven prior times this has happened, stocks were down the following year five of the seven times.
Going forward
With the fundamentals, technical indicators and historical perspective fresh in mind, we believe prudent investors should consider taking some risk off the table. From current lofty levels, is it not possible stocks could be ready for a correction? We will be reducing equity exposure slightly before the end of the year for our clients. We also feel that the tremendous increase in our national debt will debase our currency and so we are increasing our gold position.
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Dana Consler is executive vice president of Karpus Investment Management. Consler can be reached at (585) 586-4680 or email dana@karpus.com.
