Market volatility increased with sharp price declines in most leading market sectors, followed by sharp rebounds. Fed policy continues to add liquidty and cental banks worldwide are doing the same. These develpments justify a generally risk averse posture toward stocks which is further amplified as follows:
The Federal Reserve still looms large, and any increases in interest rates can be a headwind to increasing stock prices. Moreover, global market forces further pressure U.S. markets as global economic growth, changes in currency exchange rates, liquidation of sovereign wealth funds and escalating conflicts and trade wars take their toll. Also, the election cycle in the U.S. this year has been particularly divisive and erratic, causing unprecedented concerns about increasing political dysfunction.
Before making overly aggressive commitments to equities be prepared to wait for some stabilization of stock prices and interest rates. A final risk that requires monitoring are signs that the worldwide economy may be entering a period of contraction.
As these risk factors play out, exposure to broad market ETFs and a heavy cash allocation may the best strategy for this rolling market.
We favor raising cash on any major market moves to the upside and underweighting exposure to emerging market stocks.
We would continue to avoid hedge funds and any debt financed investments.