The wrangling on Capitol Hill over the budget deficit dominated the news in July. The government’s continued propensity to spend outside of its revenues was beginning to catch up with it. Running up a larger and larger deficit, especially what has been added over recent years in order to try to stimulate the economy after the financial crisis, was not a sustainable position. This intuitive point has been extolled by the rating agencies throughout the year.
Although the news received wall to wall coverage in the media with many doomsayers predicting a financial disaster, the market showed little reaction to the back and forth in Washington. The Dow and S&P 500 were within 1.1% of their post financial crisis highs at the start of the final week of July. In the fixed income markets, the 10 year Treasury yield, the benchmark measurement for fixed income, fell throughout the month. It hit its lowest level for the month of the last trading day of July. If investors were truly concerned about the debt ceiling not being raised and the government defaulting on its debt than the yield would be rising as investors would have required a higher yield to be compensated for the greater perceived risk. Over the final week of the month, uneasiness that an agreement had not been reached did weigh on the U.S. stock market, but the primary issue pushing stocks lower was renewed concerns about the economy. The housing market continued to report weak numbers, business spending fell, several firms announced large scale layoffs, and GDP for the second quarter came in well below expectations with the additional news that first quarter growth was revised to be only slightly positive. Investors, very concerned over these issues, exited equities and fled for the safe haven of U.S. government debt. Thus, investors saw past the political theatre and were more concerned about how risky investments would perform with potentially weakening growth.
While the U.S. stock market had a poor month on growth concerns, outside the U.S. there are many positive stories of growth. It is important to not simply think of the U.S. and European markets, but of the world market. Having a globally diversified portfolio exposes one to these countries and corporations that are not as dependent on the U.S. At the end of July reports came out that Brazil’s economic growth remains strong, Japan’s retail sales have bounced back stronger than expected, China is expected to grow by 9.4% this year, and Australia has seen its currency rise to the highest level in 30 years. By investing internationally, one gains exposure to all of these growing and improving markets.
The lesson to be learned in all of this is to take a long term perspective of your portfolio’s asset allocation and continue to broadly diversify. If you focus too much on what is happening in the near term and try to adjust your portfolio accordingly, you will likely knock the long term goals of your portfolio off course. If a move to a very conservative portfolio is made, you might find your portfolio woefully unprepared to meet its goals when the time arrives. In addition, trying to time when the market might bounce back usually has negative results. The markets will be volatile, but over the long term it has been shown that stock investors are compensated for the risk that they take. By being broadly diversified you can minimize your exposure, and therefore your risk, to being too concentrated in any one asst class or investment. This diversification helps protect against unpredictable future outcomes and allows exposure to strong or growing markets whether they be in the U.S. or elsewhere.
Index Performance July YTD
US Large Cap Stock (Russell 3000) -2.29% +3.92%
International Stock (FTSE AW ex US) -1.37% +2.81%
US Broad Bonds (BarCap Aggregate) +1.59% +4.35%
US Short Term Bonds (BarCap Gov 1-5 Yr) +0.70% +2.17%
Municipal Bond (BarCap 1-10yr Muni) +0.79% +4.04%
Cash (ML 3Month T-Bill) -0.01% +0.08%
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