One Step Closer To The Edge

We arrived at vital inflection point for investment markets this past weekend.  On Sunday, voters took to the polls in France and Greece and swept new political leadership into power.  This outcome was particularly important for the following reason.  For the first time since the outbreak of the financial crisis, the people have replaced key political leadership supporting austerity and bailouts with those that have an explicit mandate to reject the status quo.

The change may ultimately mark the beginning of the end for the ongoing crisis.  Of course, the path to the end will take time and is likely to be accompanied by periods of extreme turbulence along the way.

Overall, the election results from the past weekend are signaling an increasing general public fatigue with the problems that continue to overhang the global economy.  People either don’t want to face the problem any more (France), or they just want to take the pain and get on with it (Greece).  While renewed deficit spending in France might provide a near-term boost to growth, it also has the dire potential to eventually send French debt costs spiraling and crush their economy.  But the more critical implications are associated with Greece, as the path may now be set for the country to depart from the euro currency.  This has the potential for a variety of chaotic aftershocks.

The European elections have occurred at a critical time for U.S. markets.  At the end of June, the U.S. Federal Reserve’s latest stimulus program known as Operation Twist is set to expire.  This is important because Fed stimulus programs since the beginning of the financial crisis have artificially inflated both the stock and bond markets in a significant way.  And just as staggering stock market declines occurred almost immediately following the end of these past stimulus programs, stocks are primed for another sharp correction once again in the coming months (the outlook for the bond market is mixed due to opposing forces at work).

For these reasons and more, it promises to be another interesting summer for investment markets.  This backdrop has important implications for portfolio strategy and asset allocation.  As a result, a gradual tactical shift in allocations is likely to occur over the coming weeks as we move into the summer.

Fortunately, a variety of strong investment prospects continue to exist in such market environments.  In addition, particularly attractive opportunities can present themselves during periods of market turbulence.

With this perspective in mind, selected core positions are likely to remain in tact.  Others allocations are likely to be more opportunistically traded going forward.  Lastly, a potentially sizable cash and/or cash equivalent positions may be raised at selected points in time.  This may be done in an effort to sidestep periods of heightened volatility while also standing ready to purchase assets that may become extremely oversold during short-term market liquidations.  I have already been in the process of raising cash since the beginning of the second quarter, and this may continue depending on how market conditions unfold in the weeks ahead.

In the coming days and weeks, I will be making regular blog posts detailing portfolio changes and latest portfolio allocation strategies and perspectives.  For those that would rather not visit the blog, I will be sending periodic e-mails (most likely on a weekly basis) to current clients designed to summarize the content of these blog posts.  I will also be posting additional detailed analysis in articles on Seeking Alpha.

In the meantime, the following are the categories that make up the GWM composite asset allocation at the present time.  While each client account is managed with specific objectives and circumstances in mind, listing these categories is designed to provide the general framework of my latest perspectives on investment markets.  I have provided a brief note on each position and will provide more detailed explanations of each in upcoming blog posts.  And as events unfold in the coming months, I will also announce any changes to this category framework along the way.

Agency Mortgage-Backed Securities (MBS) – Focus of future Fed stimulus programs
U.S. Treasury Inflation Protected Securities (TIPS) – Defensive inflation protection
Long-Term U.S. Treasuries – Stock market hedge, yield
Municipal Bonds & Build America Bonds – Stock market hedge, yield
Gold & Silver – Hard asset protection against crisis, stimulus and inflation/deflation
Tactical – Includes positions held opportunistically as select situations present themselves in stocks, preferred stocks, high yield, real estate, commodities, bonds, currencies, volatility and cash

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

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