So far in 2016 the bears have a decided advantage. We have seen all major indexes take sizable hits, with the low point (so far) on January 11th. The NASDAQ Composite, which closed 2015 at 5007, dropped as low as 4,419, or by 11.7%. Although the markets have rebounded somewhat from the lows, we are still decidedly negative so far in 2016.
I began reinvesting cash as the market corrected this month, culminating with a sizable investment on January 11th, placing about 60% of total cash to work that day. I am now approximately 90% invested for clients, with 10% reserved in the event that markets take another dip to levels lower than we saw earlier this month. I would not be surprised to see the S&P 500, which dipped to 1,812, fall as low as 1,780. if that happens, or if we get close to that level, I will invest all remaining cash. While we could obviously see even lower levels in the short-run, I would be very comfortable with investments made at or near that level.
My weightings include technology (about 32% of portfolios), industrials (about 20%), consumer discretionary (about 13%), healthcare (biotech; about 3%), financials (about 9%), and energy (about 14%). My weighting in energy represents roughly twice the normal weighting you would find in the S&P 500. With the recent heavy drop in crude prices, I feel the opportunity is attractive in oil, but only in the major integrated companies, which can benefit from their positions of strength in the industry by taking advantage of opportunities to buy assets of failing or failed smaller producers that don’t survive. The oil services companies should also benefit as well maintenance is typically deferred due to lack of available cash from smaller companies, so when the major buy these wells, they usually need to catch-up on the maintenance.
My expectations for the stock market for 2016 are relatively positive, with a target for the S&P 500 of 2,100. From the recent low of 1,812 this would represent a gain of about 16% over the course of the year. During the year, however, I do not expect to have a smooth ride. Rather, I would expect the volatility we have seen to-date to continue, making it necessary to have a well-defined investment strategy formulated, put into action, and maintained, even when the investing environment looks challenging or downright bleak.
Those of you who enjoyed my radio spots on KZSB will be pleased to note that I will be providing once a week Economic and Stock Market Wrap-ups on Fridays, starting very soon. I do not know the specific time of day yet, but I will be moving forward with those weekly updates very soon.
I waited a very long time to get to a point where I felt comfortable investing cash balances for my clients. With the exception of placing a few orders back in August when we had the “flash crash,” I have been sitting in cash for more than a year before my recent purchases. I am happy to have finally had the opportunity to put the cash back to work, and so far my client’s portfolios are positive by a nice margin. Today’s Fed action, or lack thereof, has put some renewed downside pressure on stocks, but I suspect this will be short-lived. Most earnings reports have been positive and with the recent declines in stocks, valuations are much more reasonable.
I look forward to a profitable year for investors and, as always, am available for consultations if needed.
To your financial success.
Craig D. Allen, CFA, CFP, CIMA
Founder & President
Allen Wealth Management