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Expert Perspective

News, research and market insights from our team of experts.

Investment e.Perspective

Current Issue | April 27, 2017

Look Before You Leap

By: Mark M. Green, CFA, Chief Investment Officer and Oxford Investment Fellow


Volatility continued in the global financial markets during February, led by the usual factors: Deteriorating economic fundamentals, both globally and in the US; concern over market valuation, both in the equity and fixed income markets; and macro-event factors, such as the divergence in global monetary policy, rising prospects of an economic hard landing in China and the destabilizing effects of the ongoing collapse in oil prices.

All of this serves as a reminder that financial markets, like economic activity overall, move in cycles. They are perfectly predictable, in that we know they will happen, but very difficult to forecast in terms of timing and magnitude. The bull market for US stocks that began in 2009 has been one of the longest and strongest in history. It has been driven by many factors, a number of which we have discussed previously, including the inflow of foreign capital seeking the safety and liquidity of dollar-denominated assets.

The result has been a strong dollar, high domestic equity valuations, low government bond yields and extreme narrowing of leadership and market breadth. These are all late-cycle indicators, common at turning points in the overall market cycle.

Turning points often also trigger certain behavioral biases as investors succumb to the temptation to "time" perceived dynamics in the markets. We cannot say this more explicitly: market timing and short-term trading are antithetical to long-term investing and portfolio management. Tactical adjustments are one thing, market timing is something else altogether.

While it may be too early to call the end of the bull market, it certainly seems as though we may be passing through an inflection point in this market cycle and some sectors are clearly in bear market territory. (See Bob Schaefer's article in the January issue.) The potential consequences of a protracted bear market are significant. Our general advice reflects a certain amount of caution and defensive portfolio advice is dynamic, however, and will evolve as market conditions change.

In other articles this month we explore some of these issues in more detail. Cam Johnson discusses many of the recent dynamics in the US equity market, including value and momentum factors as well as their impact on active versus passive management strategies. Jared Nishida provides valuable perspective on yield-oriented investment strategies, and the temptation to jump back into beaten-up strategies like MLPs and high-yield bonds. There may soon come a time to increase exposure to these strategies but for now caution is the watchword.

The above commentary represent the opinions of the authors as of 2.29.16 and are subject to change at any time due to market or economic conditions or other factors.