June 2012 Investment Update

The year opened with a quarter of exceptional returns for markets such as the S&P 500. This rising tide was quickly curtailed in April and May. The ongoing European troubles have reached a new crescendo. Withering employment and housing numbers in the US added fuel to the fire in May.

The situation in Europe is complicated and includes both real economic challenges and unresolved political questions. The combination has led to a slow-moving crisis without the sign of an end. The primary issues we're watching today:

  • Greece Unraveling. We do not know of any credible experts who think that Greece is solvent today. The insolvency is a foregone conclusion but related political upheaval has escalated the crisis. We now look to June 17 elections to determine remaining support for continued membership in the EU. A so-called "Grexit" would be unprecedented and would bring even more challenges to Greek recovery.
  • Contagion in Spain & Italy. While Greeks have been wreaking havoc on their banks by hoarding Euros, Spain and Italy seem to be experiencing their own quiet bank run. Unemployment rates are very high in Spain and Italy and borrowing costs continue to rise for the governments. Earlier in the year, the ECB fiscal relief program infused money into banks, but did little to fix their exposure to bad sovereign debt along with other bad loans. Finding a way to secure investor sentiment in these economies remains critical.
  • Slowing Growth. The odds of a European recession are high and growing. Meanwhile, signs of slowing growth are cropping up in places like China and here in the US.
  • End of US Stimulus. "Operation Twist" is scheduled to wind down this spring and summer. We have long seen 2013 as challenging regardless of the presidential victor because of agreed-upon fiscal cuts plus tax breaks which are scheduled to expire. Add to that the need to rehash the debt ceiling discussion, and we know the US Government and Economy will be in headlines that rival Europe in the coming months. With US interest rates at record lows (going back to WWII), a new Fed program to buy even more treasuries would seem to offer very little in the form of help for investors.

What actions should investors take? We can share some strategies that we’re using with our clients from a financial planning and wealth management perspective.

  • Work with a professional who is looking forward with today’s situation in mind. The challenges listed above have been on our minds and on the minds of our portfolio managers regardless of market returns. We discuss these issues on a daily and weekly basis within the firm as well as with money managers and peers. For many managers, a European outcome may be a "United States of Europe" approach with more centralized EU power. This, they say, will not happen without considerable effort and time.
  • Look at your risk orientation. In 2011, we considered significant changes to positions for our clients in anticipation of sustained volatility (which we saw last summer and seems to be popping up again). From our point of view we may continue to see more uncertainty this summer and through the presidential election cycle in November. We have been underweight dedicated international positions and our managers have tilted portfolios toward Asia and away from Europe. We have incorporated alternative strategies which have historically had a less direct relationship to the whims of stocks and bonds. This is not a blanket prescription but our point of view. You should know your own posture in terms of investment mix.
  • Stick with your plan. Because of the changes last year, we continue to be comfortable with portfolio positions today and do not anticipate a significant overhaul to portfolios. That said, our focus on monitoring investment mix in light of current scenarios is as vigilant as ever. If you have started a plan, you need too much change or doubt may result in a drag on your portfolio’s returns.
  • Rebalance when appropriate. If markets continue to decline, we may rebalance portfolios into the assets that have declined. This is by design and meant to position investments through a forward-looking lens rather than the natural human tendency of focusing on the rear-view mirror. Ultimately, we believe that volatility will lead to buying opportunities.
  • Talk to someone when you have concerns. Working with a CERTIFIED FINANCIAL PLANNER™ is a partnership. A financial planner can help uncover your concerns and find answers for your fears! Most importantly, when your financial situation is changing, make sure to update your overall financial plan and analyze your investment mix based upon the new information.

As the summer gets going, you should be able to enjoy barbecues with family and friends rather than worry about the ups and downs of stocks and bonds. Ultimately, you are investing so that you can achieve your financial goals. If you ever have questions about investing or comprehensive financial planning, don’t hesitate to contact us.


Melissa Joy, CFP®
Partner, Director of Investments
Investment Advisor Representative, RJFS

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Past performance may not be indicative of future results. Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Alternative investments are available only to those who meet specific suitability requirements, including minimum net worth tests. There are special risks involved with alternative investments, including investment strategies, and different regulatory and reporting requirements. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates Investing involves risk and you may incur a profit or loss regardless of strategy selected.