When economic uncertainty rules—and it rules now—it is critical to ask the right question. Now that equity markets have risen from their March 9, 2009 lows (US: +61%; Non-US: +85%), some commentators claim that we are in the early stages of a long-term bull market recovery (where were they on March 8?).
At the same time, other analysts point to massive residential and commercial refinancing issues in 2010-2011, weak consumer spending, and seemingly persistent unemployment (where were they in July 2007?). They argue that there is another shoe to drop, that it may drop quickly or slowly, and may take a year to ten to work through these many economic challenges.
If one is building a portfolio for such extreme uncertainty, “So what?” becomes the critical question. Don’t look for absolutes from economists (the vast majority of whom completely missed predicting the current crisis). Instead, consider what is fairly certain then decide what to do about it.
- While in the US, consumer spending remains weak, consumers in China, India, Southeast Asia, and Latin America are dramatically increasing their income and spending. They are building infrastructure, producing, buying, and driving cars, and eating more often and higher on the food chain. So what are you doing to hedge against—and potentially profit from—inflation?
- According to the FTSE All World Equity Index, non-US companies represent 60% of the investible equity universe. So what should your equity allocation look like?
- The dollar has grown steadily weaker versus the Yen and Euro and the US Treasury continues to print dollars at historically high levels. So what are you doing to hedge the weakening dollar and minimize the risk associated with Treasuries?
- Projected economic growth rates in emerging economies are much higher than those in developed countries. So what is the growth engine in your portfolio?
- The spreads on corporate credit remain compelling versus Treasury and Agency bonds, yet the Barclay Aggregate Index is less than 20% corporate bonds. So what does your bond allocation look like?
- More banks have failed in the last year than in the preceding decade and FDIC is severely taxed. So what should you think about when selecting a custodian, money market provider or CD issuer?
These are intense times. We wish you all the best.