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Third Quarter Tactical Allocation Update | Sean Barron

Since the financial crisis, short term market movements have been increasingly driven by central banks, government actions, and social unrest. Second quarter’s markets results were largely defined by the following events:

  1. First, the Bank of Japan (which has suffered through two decades of low to negative inflation) started an unprecedented easing program that resulted in a stock market rally and a sell-off of the Yen.
  2. Then the U.S. Fed stated they are planning on reducing their purchases of bonds as part of QE3. As a result, the dollar appreciated and bonds declined in value. We believe the rise in yields was overdone and elaborated on this in a recent blog post.
  3. The Bank of England and the European Central Bank followed the Fed’s announcement by declaring they do not intend on tightening any time soon, leading to a rally in European stocks.
  4. Finally, there has been social unrest in Turkey and Brazil, tighter interest rate policies in Brazil, India, and China, and slowing growth in most emerging economies. This has led to poor performance in these stock markets.

All of these events have been reflected in recent market movements. Our expectations are that the Fed will not 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. The U.S. stock market continues to hold pockets of value and developed international markets look more attractive, given the accommodative policy and the probability of Merkel’s reelection in Germany. Emerging markets will continue to experience a re-rating of risk as recent political and social events will (and has) force investors to require a higher rate of return to invest in those markets. A slowdown in China and a strong dollar should continue to hold back commodity prices.

As a result of these expectations, we have made some tactical portfolio changes. We sold off our gold position at the first of April. After the end of the quarter, we saw one of the first quality bond buying opportunities in years and took advantage. Also, we reduced our overweight positions to emerging markets and natural resources to add to developed international equities, eliminating our long standing underweight to that asset class.

So far this year, our individual stocks and bonds have outperformed their respective indexes. Tactical allocation has added value by being over-weight U.S. Stocks and underweight bonds, but overweight positions in emerging markets and natural resources has offset much of this performance.

Sean Barron
Portfolio Manager
Delta Trust & Bank | Trust Department
sbarron@delta-trust.com

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