The plain and simple truth about the economy and the market is based on obvious facts and less on hope, hype or humor.  Even though the economy has not gained much traction four years into its slight recovery mode, the Fed has exerted a tremendous impact on the markets —just the same as it always had in the past.  This should come as no surprise.   Market observers suggest that the Fed’s highly accommodative policy of quantitative easing has added 300 to 500 points on to the Standard & Poor’s 500-stock index, bouncing around its all-time high.  And remember, the Fed’s powerful actions have lifted the rallying bulls from the treacherous lows during this four-year cyclical run.  So it is conceivable that the bulls could keep charging uphill provided inflation remains in check, the economy continues on the long road to recovery, and the geopolitical landscape offers a collection of calmness. 

While we may have more confidence in the quality of corporate balance sheets since the clean-up from the financial crisis we certainly do not want to shy away from solid bond holdings and/or acquiring consistent dividend paying cash flow related assets.  And we opportunistically do not want to avoid the benefits of owning a Fed supported bull market.  We must challenge the outlook for corporate earnings growth which is much dependent on the velocity and tenor of a recovery and the timing as to when this may be coming.  Nonetheless, we are not making a ‘bet’ on acquiring one asset over the other nor suggest you engage in ‘market timing’ entrance or exit to these asset classes as a whole.  Rather, we advocate investors should continue on an investment course that includes both strategic extreme asset diversification and regular volatility monitoring for managing downside market risk exposure. 

As a result, investors should remain sufficiently diversified across asset classes, asset types, and asset economies.  This means considering both equities and bonds across all cap measures, domiciled amongst domestic, international and emerging zoned economies, and contain inflation sensitive assets such as energy, metals and other hard assets.  Coupling a strategic asset allocation with a tactical rules-based risk-managed strategy that attempts to manage downside risk relative to the market’s volatility is both prudent and elegant in process.  We believe this type of dual-purposed strategy benefits the investors overall portfolio -allowing investors the best opportunity to capture the market’s potential while managing the downside market risk exposure.  

 

Theodore S. Douglas is President and Chief Investment Office at Pioneer Advisors, LLC.