Climbing a Wall of Worry - Alaska Permanent Capital Management


Climbing a Wall of Worry

Jeff-PantagesThe S&P 500 gained 0.4% to 2,065 in April and is now up 1.7% so far this year. Smaller stocks (S&P 600) gained 1.2% and are up 3.9% year to date (YTD). Overseas, the developed country EAFE stock index jumped 2.9% last month, while the emerging markets continued to rally bringing their YTD return to 6.3%. Brazilian equities gained an astonishing 43.8% since a recent low in January on hopes that the President there would be impeached and a new more responsible government takes charge.

Government bonds tread water over the month with 10 year Treasury yields up just over a nickel to 1.83%. Meanwhile investment grade corporate bonds beat Treasuries by 1.5% last month while riskier high yield (HY) bonds provided a 4% total return. That brings HY returns to over 7% YTD as corporate debt has continued to rebound from its severe November-February selloff.

Risk assets have done better of late as fears of recession proved overblown. Oil has rebounded from $26 in February to $46 at the end of April and the US dollar has weakened as the Federal Reserve dialed back its rate increases this year. While corporate earnings have been soft recently (actually negative for four quarters in a row) the headwinds of falling oil and dollar strength are dissipating and suggests improvement ahead.

Indeed one might characterize the market action this year as “climbing a wall of worry.” Equity markets have slowly but surely regained their footing despite a disastrous January, however investors remain skeptical and worried. Market sentiment is not euphoric, but rather pessimistic. And that’s a good thing.

A Barron’s cover story about their survey of money managers was billed as a time for caution warning: “Only 38% of the Big Money poll say they are bullish, down from 55% in last fall’s poll. The survey is one of the least bullish ever.” I would also note that money is still flowing out of equity mutual funds towards bond funds.

Recent headlines like the ones below paint a similar cautious outlook:

  • The outlook is still ripe with risks.
  • G20 worried about global growth.
  • Citi slashes US outlook, risks very evident.
  • PepsiCo warns of weakening global growth.
  • NY Fed says “we continue to face significant uncertainties and headwinds.”

ISI Strategies notes: “History suggests that quotes like this occur when equities are advancing. Quotes like ‘the outlook is bright’ typically occur when equities are poised to decline.”

Indeed, I am old enough to remember a Business Week headline in 1979 titled “The death of equities.” Stocks had been flat from 1968 to 1982. From that point emerged the biggest bull market in history!

Bonds were being called “certificates of confiscation” because inflation was raging in the late 70s and early 80s. Bond prices cratered. Nobody would touch a long treasury bond yielding 15%. That’s not a typo. Treasury bonds at 15%. They are now under 3%.

Sometimes fear is justified, but more often it is not. Rest assured, there will be new monsters under the bed over the coming months that seem to threaten portfolios. It’s okay to pull those covers up to your chin and keep your feet off the floor. But stay in the market and be diversified. You will wake up in the morning and all will be well.

Jeff Pantages, CFA®
Chief Investment Officer



Share This