Why take risk off the table ?

Written by: Steven Bouchey
Why take risk off the table ?

We rebalanced our clients’ portfolios a few weeks ago in order to take risk off the table and some asked why with the markets rising like they have. After such a huge run-up in stocks over the past few years, we felt it was time to trim our equity positions and bring them back to their target percentage. If your target for a Growth & Income portfolio was 60% stocks and 40% bonds/alternative assets / cash, the strong rally may have brought your equity exposure to 70% or more. While the markets were hitting all-time highs almost daily, we felt it was prudent to pare back our stock exposure and bring our clients back to their target %.

Investors felt some volatility this week with all that is going on around the world:

• Ongoing problems in the Middle East, Russia and Ukraine
• US GDP report showed that our economy grew at a 4% annualized rate for the second quarter
• Federal Reserve statements on Wednesday
• Portugal’s largest bank, Banco Espirito Santo, posted a staggering $4.8 billion (yes that’s billion with a B) loss
• 10-year US Treasury yields spiking to over 2.6% on Thursday when the strong Employment Cost Index (ECI) came out higher than expected (up 0.7%), the highest jump since 2008.
• Argentina defaulting on its debt Thursday which wasn’t good for emerging markets.

• July’s Jobs Report added 209,000 jobs …see more below.

July’s gain of 209,000 nonfarm payrolls was slower than expected but shows that the economy is chugging along. The good news is that it’s not strong enough for the Fed to raise interest rates any time too soon which is the opposite of Thursday’s Employment Cost Index rising which had the same effect on Treasury yields – mixed messages for sure.
• Unemployment rate rose to 6.2% from 6.1% because the participation rate (workers in or looking to be in the workforce) rose slightly from 62.8% to 62.9%.
• June’s revision rose from 288,000 to 298,000 new jobs

Stocks were mixed earlier in the week before tumbling 2% on Thursday putting the S&P 500 Index in the red for the month of July but still up +4.5% for the year. As of Friday afternoon, the markets were down less than 1%.

We feel that our decision to take risk off the table was prudent on behalf of our clients and it may be a good time for investors to speak with their advisors about doing the same. Overall, we like stocks more than any other asset class and are optimistic that stocks will reward investors over the next few years.

Enjoy the month of August, before we know it, fall will be upon us.