As the Greek drama unfolded last week, we also witnessed a meltdown in the China stock market, an unprecedented 4 hour halt in trading on the New York Stock Exchange, and news that over 21 million Federal workers private information was hacked. Even as the markets recover this week, it’s a reminder that things are far from stable just yet. And a reason to believe that market volatility will be with us for a while yet.
Because market volatility (risk) continues to be high, I used the recent rally to selectively pare back on stock exposure. And last week, when bonds surged, I used it as an opportunity to sell off some of my positions in the Vanguard Extended Duration US Treasury Bond ETF (EDV). Those sales have increased my position in cash. I still own some selected stocks. My largest position is in the Vanguard Healthcare ETF (VHT). That is my largest overall position behind the iShares 20+ Year Treasury Bond ETF (TLT) and EDV.
I also hold some other biotech and/or healthcare-related stocks such as Alexion Pharmaceuticals (ALXN), CVS Health Corp (CVS), Unitedhealth Group (UNH), Regeneron Pharmaceuticals (REGN) and Gilead Sciences (GILD). I also hold some other consumer stocks, but the overall exposure to stocks is roughly half of what it was 2 weeks ago. With the summer doldrums setting in and worldwide market volatility (and uncertainty) lingering, I am comfortable being defensive at this time.
A recent article by Jim Rickards of West Shore Funds (“Yellen’s New Speech – Wash, Rinse, Repeat”) lays out the reasons why it is highly unlikely that the Federal Reserve will raise interest rates this year. Check it out. Here’s an excerpt:
In Providence, Yellen’s rate increase language was preceded by “If the economy continues to improve as I expect…” In Cleveland, her rate increase language was preceded by the phrase, “Based on my outlook…” In other words, Yellen’s views on rate increases were conditional on her economic forecast.
A review of the Fed’s economic forecasts for the past six years reveals they have the worst forecasting record of any major economic institution. They have missed their targets every year by orders of magnitude. They have not even come close to accurately forecasting the path of economic growth. That alone would lead one to conclude Yellen will not raise rates this year.
And if the Federal Reserve remains on hold and puts off a Fed rate hike as I suspect, then this should be positive for bond positions over time. Interest yields will likely remain volatile but as economic data continues to disappoint (which I believe will be the case), then yields should come down and the value of treasury bond positions go up.
Here is a brief synopsis of recent economic releases by MarketWatch:
Pretty glum day for economic indicators https://t.co/F3oSCvcLc8 pic.twitter.com/VbNgIHMI5t
— MarketWatch Economy (@MKTWeconomics) July 14, 2015
Have a great week and thanks for reading.
Twitter: @JeffVoudrie
The author holds positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
