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Fourth Quarter Tactical Allocation Update|Sean Barron

Legislation just passed that raises the debt ceiling through February 7, 2014 and will fund the government through January 15, 2014. Although these talks did not impact the market much, the continuing gridlock is beginning to try the public’s and investors’ patience.

 We stated in our last quarterly review that we did not expect the Fed to “raise rates anytime soon. The Fed is not taking money out of the economy; it is just announcing that it will put less in. The market will realize this and rates should decline off their highs.” Our expectations materialized when the Fed decided not to taper in its September meeting. Since then, rates have fallen back off their highs and given the continued dysfunction in Washington and the fiscal outlook. We expect the Fed to remain accommodative in the short and medium term. The U.S. stock market continues to hold pockets of value (e.g. high quality) and Janet Yellen’s nomination bodes well for a smooth changing of the guard at the Fed. Due to the accommodative policy, valuations, and Merkel’s reelection in Germany the international markets are looking more attractive.  A slowdown in China and a strong dollar should continue to hold back commodity prices in the short term. We continue to think that a steady global growth environment, fair valuations, and easy monetary policy lead to a constructive capital market outlook and an overweight position to risk.

 As a result of these expectations, we have made some tactical portfolio changes. We sold off our gold position at the first of April, reduced our overweight positions to emerging markets and natural resources, and went overweight developed international equities- eliminating our long standing underweight to that asset class. We were able to take advantage of buying some quality bonds at yields that we expect to outpace inflation during the quarter. Finally, we added a new mutual fund to our list of mutual funds, Thornburg Developing World Fund. This fund invests in companies that target the emerging market consumer and help diversify us away from the naturally large commodity exposure found in most emerging market funds.

 

Sean Barron
Portfolio Manager
Delta Trust & Bank | Trust Department

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