In a few weeks, we reach the beginning of that six-month stretch when stocks over the decades have tended to perform at their best.
But looking ahead, David Kotok, chairman of Cumberland Advisors and a respected value investor, is decidedly cautious.
I have referenced his piece because of the level of detail he provides readers about what he’s been doing with his accounts.
What’s interesting is that Kotok makes a distinction between short-term risks, which he often reacts to by adding cash to portfolios, and longer-term geopolitical risks that tend to dominate the headlines and often cause less sophisticated investors to consider selling off stocks.
Of those much discussed geopolitical risks, including the rise of the terrorist group ISIS in Iraq and Syria, he writes, “The U.S. stock market went through successive geopolitical risk shocks that started intensifying in July 2014 and have continued through the quarter. They are likely to be with us for many more years. The sources of these tensions are not going to be resolved easily or disappear. Geopolitical risk and all of its ramifications are here to stay.”
He goes on to say that “we have sold our small-cap positions. Energy prices are falling; we are underweight. And we are again maintaining a cash reserve. One of the best-performing sectors of the year is Utilities. Our US ETF models include an overweight in Utilities, and that decision has helped the performance of those accounts.”
One piece of evidence that geopolitical risks aren’t ratting investment markets is the price of gold. Surely, the disaster metal would be rallying if investors were fretting about the fate of the world. But stocks have held their value and gold has declined about 9% over the past six months. The metal hit its lowest level in over a year to $1,183 an once Monday.
Gold’s decline has no doubt been helped along by a strong U.S. dollar. Any student of the precious metal knows that the value of gold and the dollar tend to move in opposite directions over time.
In a piece on the Bloomberg View site Monday, money manager and journalist Barry Ritholtz argues that the reasons why gold has suffered in recent years are all too obvious.
“Less so are the many reasons why some investors remain overweighted in this underperforming asset class,” he writes. “The idea that the world is ending and the accompanying demand for guns, canned food, bottled water and gold, is having difficulty attracting new adherents in an era of falling unemployment and rising wages. Indeed, many of those who hold those views are having a hard time reconciling their misplaced faith with reality.”
The problem with the piece is that Ritholtz doesn’t attempt to answer the question posed in the headline – How Low Can Gold Go?”
Instead, he argues a viewpoint that I have long held – that investor judgment can get clouded when they fall in love with an asset or a stock. Gold is such an investment, as are shares of Apple ( AAPL ).
By contrast, investors in zinc or nickel can’t be accused of blind love.
Of course, gold is not the only commodity that has suffered in recent years.
And as an excellent article in the Financial Times points out, anyone interested in investing in emerging markets, either through individual stocks or a fund, needs to consider the role that commodities such as basic metals and oil and gas play in helping or hurt shares of emerging-markets stocks. Moreover, the article points out, the prospect of rising interest rates and a rising dollar could put a crimp of emerging-markets values.
As the article points out, the demand from China that lifted commodity prices for a decade is a thing of the past. And with the shale revolution driving the US to a multi-decade rebound in crude oil exports, the “global oil market is undergoing structural change that will keep oil prices low for years to come.”
I’ll close by citing a piece by USA Today on the five reasons why a 10% stock-market correction could be bullish for markets.
I realize that USA Today has a mass-market readership and that many of those readers have a simple view of investing. But this piece seems to dwell in the patently obvious. When writer Adam Shell states that lower stock prices means that investors on the sidelines can get into the market at lower prices, or that PEs will fall in value, I can only say, “Duh.”
Is it just a matter of time before USA Today fills us in on the merits of buying low and selling high?