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Monthly Market Update
by Team of Litman Gregory,
Last month lived up to October’s traditional reputation as a difficult one for global stock markets. As political pundits discussed an “October surprise” in the context of the U.S. presidential election, investors were busily reacting to a series of developments that ultimately depressed returns. Stocks were pushed down in part by better-than-expected economic data, which investors viewed as raising the odds the Federal Reserve will increase interest rates in December.
Our Perspective on the Brexit Vote
by Team of Litman Gregory,
Britain's decision yesterday to leave the European Union roiled global markets today. Investors' significant negative reaction reflects several fears and concerns over the lasting impact of the vote. While we acknowledge Brexit may increase both the likelihood and magnitude of shorter-term downside risk, we have positioned our broadly diversified portfolios for resilience across a wide range of scenarios, including periods of increased volatility like this one. We will follow up if our assessment results in material changes to our views or portfolio positioning.
Evaluating the Current Credit Cycle
by Team of Litman Gregory,
Like the equity markets and economic activity, the U.S. fixed-income market also moves in cycles. When we think about the credit cycle, we divide it into three broad stages: the recovery, the expansion, and the downturn. Based on qualitative and quantitative factors, we believe we are in the later innings of the expansion phase, as we explain in this piece.
Market Cycles and Portfolio Positioning
by Team of Litman Gregory,
The post-financial-crisis period has been dominated by a few very strong market trends. It is important to view these for what we believe they are—cycles that will eventually turn and may be in the process of turning. In this commentary, we discuss the concept of cycles as well as several very specific cycles we’ve experienced in recent years.
Why Alternatives, Why Now?
by Team of Litman Gregory,
U.S. stocks. and core bonds currently look unattractive relative to their return-generation and risk-reduction roles in our portfolios, leading us to research and invest in alternative strategies that we see as more compelling on a risk/return basis.
Constructing a Balanced Portfolio
We often write about how our tactical asset allocation investment process seeks to use shorter-term market price volatility to our long-term advantage. Of course, while it is easy enough to say volatility creates opportunity, the reality is that volatility can be stressful and painful when you are actually experiencing it in your portfolio.
Why We Believe Emerging-Markets Stocks are Attractive
by Rajat Jain of Litman Gregory,
There is certainly no arguing that over the short term, investing in emerging-markets stocks can be a bumpy ride. This is especially true if you invested in the asset class during the crisis-prone years of the late 1990s and early 2000s. When asked why we believe in investing in the asset class, we point to our overarching belief that emerging markets' macroeconomic fundamentals are much better now than they were during those crisis-prone years. In this update, we provide further background on our analysis.
How We View the Big Picture
by Team of Litman Gregory,
We are regularly asked for our take on the broad macroeconomic topics of the day. Two of the more noteworthy big-picture subjects we have been asked about recently are the Greek debt crisis and the timing of the U.S. Federal Reserve rate hike. In most cases, we don’t believe we have new insights to add beyond the reams of commentary these topics typically inspire, and given the dynamic nature of these two topics, it is quite possible that new information will unfold as we publish this or shortly thereafter.
Macro Is Not the Markets: The Global Economy and the Resulting Investment Environment
by Jeremy DeGroot of Litman Gregory,
In a recent client Q&A event, Litman Gregory chief investment officer Jeremy DeGroot shared his thoughts on the global economy. He pointed out that, historically, macroeconomic cycles and financial-market cycles have not coincided, which has implications for asset allocation. Investors need to analyze the stock market separately from the economy.
The Case for Global Investing
by Team of Litman Gregory,
As U.S. stocks have outperformed developed international and emerging-markets stocks in recent years, we’re starting to hear more people question the benefit of investing outside of the United States. This is an important question, and we acknowledge that owning foreign stocks has been an unsatisfying experience over the past couple of years. Moreover, given some of the current economic and geopolitical forces, it can appear likely to continue this way.
Knowing What You Can't Know, Knowing What You Don't Know, and Staying Disciplined in Your Investment
by Team of Litman Gregory,
In our investment analysis and decision-making, we try to focus on what is knowable with a reasonable degree of certainty or within a reasonable range of outcomes. We also recognize the importance of staying within our circle of competency, which means not investing in things we don't fully understand. And while our investment discipline requires us to adapt and change our views if the facts and circumstances change, it also protects us against getting swept up in the short-term noise and emotions of the markets.
Second Quarter 2014 Investment Commentary
by Team of Litman Gregory,
Overall, our macro view and assessment of the risks and returns across the major asset classes has not changed meaningfully since last quarter. We continue to see the U.S. and global economies on a slow path of recovery from the 2008 financial crisis. ... Despite our more positive fundamental outlook, we also continue to view the markets as too dependent on central bank largesse, too short-term focused, and too complacent about the risks and imbalances that remain in the global economy in the aftermath of the financial crisis.
2013 Year-End Investment Commentary
by Team of Litman Gregory,
We find ourselves with a more sanguine big-picture view, at least over the nearer term, than we have had in some time. U.S. and global economic fundamentals gradually improved over the past year across a number of dimensions, and seem poised for continued improvement or at least stability in 2014. However, as we look ahead, the longer-term risks related to excessive global debt, subpar growth, and unprecedented government policy that we have worried about since the aftermath of the 2008 financial crisis still remain largely unresolved.
Monthly Investment Commentary
U.S. stocks resumed their positive streak in July (after a slightly negative June). Large-cap stocks rose in three out of the four weeks and were up 5% for the month. Smaller companies generally outperformed their larger-cap counterparts. After Federal Reserve comments regarding the timing of its stimulus withdrawal upset markets in May and June (particularly the bond market), investors seemed to take comfort in the Feds more recent comments. Among other points, Chairman Bernanke reiterated that a decision to taper bond purchases is different from raising the federal funds rate
First Quarter Investment Commentary
by Team of Litman Gregory,
Looking ahead, significant uncertainty surrounds fiscal and monetary policy in terms of what policies will be adopted and their ultimate economic and financial market impacts. More broadly, still-high global debt levels pose an economic headwind. Against this backdrop, our outlook for stocks has not improved. If anything, given the sharp run-up in stock prices, we are getting closer to reducing our U.S. equity exposure further than we are to increasing it.
Year-End Investment Commentary
by Team of Litman Gregory,
Stocks shrugged off numerous worries to log a very good year in 2012, but can markets continue to climb? Certainly the worries remain. The most immediate has to do with the spending side of the fiscal cliff. The cliff deal made permanent the Bush tax cuts for all but high-income taxpayers but it did not address spending. So while the worst case of the cliff was avoided, the work is not nearly done. In this commentary we discuss our current assessment of the investment environment including a detailed look at what could go right, and tie it all back to our portfolio positioning.
The Fiscal Cliff, Taxes, and Muni Bonds
by Team of Litman Gregory,
We have written at length about our strategy on the bond side in many of our recent commentaries, and our focus has been almost exclusively on taxable bonds, addressing investors for whom taxes are not an issue, either due to tax bracket or account type (retirement assets for example). The fiscal cliff negotiations have brought taxes to the forefront of people's minds, and we want to update readers on our thinking about the municipal bond asset class. Our take may well be different than what youd expect based on the headlines.
Litman Gregory Mid-Year Commentary
by Team of Litman Gregory,
High debt levels in developed countries create headwinds that are likely to hamper global economic growth in the years ahead. Europe's debt woes raise the risk of a damaging financial crisis, and global stock markets reflected these concerns in the second quarter. Why are we discussing this now? It is partly a reflection on having reached a quarter of a century in business and thinking about how we have conducted our business.
Monthly Investment Commentary
by Team of Litman Gregory,
Global stock markets dropped sharply in May amid renewed macroeconomic fears. Large-cap U.S. stocks fell 6%, while small and mid-cap stocks lost 6.6% and 6.7%, respectively. Domestic stocks are still well in positive territory for the year, with returns ranging from just over 5% for large-caps to 3.4% for small-caps. Foreign markets fell further, as questions over the stability of the eurozone dominated headlines. Both developed and emerging-markets were down 11% for the month and in negative territory year-to-date (down 3.3% and 0.4%, respectively).
Monthly Investment Commentary
by Team of Litman Gregory,
Stocks and other risk assets surged in the first quarter, continuing the strong run that began in the fourth quarter of last year. In each of the past two quarters, domestic stocks gained about 12%, marking one the strongest runs over the October-March span going back to the 1920s. Developed foreign stocks increased nearly 12% in the quarter, emerging-markets stocks gained 14, small-cap U.S. stocks were up 12%, high-yield bonds rose 5%, and emerging-markets local-currency bonds added 8%.
Monthly Investment Commentary
by Team of Litman Gregory,
We recently spoke with portfolio managers from two fund management teamsChris Davis and Ken Feinberg of Clipper and Selected American Shares, and Pat English of FMIwho have historically exhibited different views toward banks and financial services firms. In addition to providing insight on current risks and opportunities in the financial sector, the interview touches on a number of topical subjects including the Federal Reserve, the European debt situation, and the housing market.
Seeking Absolute Return: Finding Opportunity in Overly Hyped Alternatives
by Team of Litman Gregory,
This commentary references and updates views originally shared in our 2003 whitepaper on hedge-fund strategies. Today, we have similar concerns about a low-return environment for stocks in the years ahead. As we concluded eight years ago, hedge-fund strategies do have the potential to add value to a portfolio. However, finding funds that are skillfully managed and offered at a reasonable cost remains a difficult challenge.
Third Quarter Investment Commentary
by Team of Litman Gregory,
Since 2008, we have been in a period where macroeconomic forces are particularly influential and must inform our portfolio strategy. This quarter's developments in which we saw heightened concerns about a global economic slowdown, political gridlock, and serious concerns about shorter-term European and longer-term U.S. debt problems are consistent with the risk scenarios we've been discussing the past several years.
Examining Systemic Risk in the Banking System
by Team of Litman Gregory,
When we spoke over two years ago, we discussed credit default swaps as speculative derivative instruments, the risks these presented to the financial system, and the need to better mitigate these risks. Can you comment on the progress the industry has made in reducing the systemic risk they pose to the financial system and talk about the risks they continue to pose? Derivatives, as such, were never entirely the problem. But, in some senses, they were symptomatic of a much deeper problemwhich is why we had created a system that was highly leveraged, highly complex, and highly networked.
Q&A with Litman Gregory Research
by Team of Litman Gregory,
We regularly use a Q&A format to address questions from readers about our investment views and current strategy. This format permits us to address a range of different topics and allows readers to focus on areas that are of interest to them. This Q&A piece was worked on jointly by members of our research team and tackles questions received during the past several weeks. We have grouped the questions into broad categories for convenience. The main topics include the Fairholme Fund, Investment-Grade Bonds, Floating Rate Loans, Municipal Bonds, International Bonds, China and Commodity Futures.
What stage of deleveraging are we in?
by Team of Litman Gregory,
The Litman Gregory research team has been assessing how long it will take for the U.S. economy to deleverage and when we can expect earnings to revert to the old trend line, which has been adjusted downward slightly after the great recession. The bottom line is that we think deleveraging started in late 2008 and that it will probably take roughly 10 years to complete the process. What this means is that going forward we will roll earnings forward at a slightly higher rate than we have in the past and, as a result, our fair-value point for the S&P will also increase at a slightly higher rate.
We Are Not Perma-Bears, But We Are Cautious Now
by Team of Litman Gregory,
To understand the potential upside for stocks it's important to evaluate the factors that drive returns and how they might behave over our investment horizon. The three key variables are dividends, earnings growth, and changes in the price/earnings ratio. Our analysis focuses on assessing these key factors under several broad economic scenarios. This allows us to estimate return ranges for stocks, and to weigh these potential returns against the risks we see to make informed portfolio allocation decisions.
Growing Federal Debt Will Cause Major Challenges in the Years Ahead
by Team of Litman Gregory,
A combination of sharply declining tax revenues and a surge in stimulus and bailout spending, both stemming from the financial crisis, caused the federal budget deficit to soar to almost 10 percent in 2009. Total debt to GDP ratios are climbing sharply, and could pass 90 percent by next year. The growth track of entitlement programs has led many to conclude that growing federal debt levels are unsustainable in the long term. Additionally, the Greek debt crisis could trigger increasing awareness of sovereign default risk with investors demanding higher rates for owning government debt.
Assessing Investment-Grade Bonds
by Team of Litman Gregory,
Investment-grade bonds are likely to generate average returns in a 1 percent to 2 percent range in most scenarios over the next five years. That is markedly lower than any historical rolling five-year average annual return number since the mid-70s. Forward-looking scenarios project that bond yields and inflation higher than their current levels and capital losses due to rising yields will cut into income from coupon payments.
The Big Picture, the Investment Landscape, and Our Portfolio Strategy
by Team of Litman Gregory,
Debt reached binge levels during the past decade. Money to reduce the debt will have to come from somewhere, and much of it will come from reduced spending. Spending cuts could produce a sluggish economy, possibly for many years to come. There are some positives that could contribute to a better outcome, however, including continued strength from emerging economies. Domestically, we could see stimulus spending, low rates, and inventory rebuilding create a virtuous circle in which businesses with strong balance sheets add jobs, and consumer and business confidence builds and feeds on itself.
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