Despite much uncertainty in the minds of many investors with respect to the path of interest rate hikes in the U.S., the ultimate impact of Brexit on England, Europe and the rest of the global economy and the outcome of the upcoming presidential election in the U.S., one thing remains certain thus far in 2016 – market leadership continues to change and evolve. We have observed some of these changes in areas such as market capitalizations, styles (i.e. Growth –> Value), sectors, fixed income and geographies. Investors should be mindful of these areas of changing market leadership as they review their asset allocation strategies for the second half of 2016 and beyond. This review can also help ensure that these investors have the diversification in place to withstand potential future periods of heightened volatility as well as the breadth of asset classes and sectors to assist in delivering risk adjusted growth opportunities. With this in mind, we offer the following portfolio management ideas for consideration for the balance of 2016.
• U.S. likely be considered a safe haven if/when global volatility returns
While we still contend that international stocks are an attractive asset class for the intermediate-longer term, we believe that the U.S. economy is relatively stable and that the secular bull market in the U.S., while starting to lose steam after reaching record highs, should continue for at least one more year. Overseas uncertainty and fears of an “over-crowded trade†in U.S. Treasuries could result in investors turning to low volatility, perhaps dividend paying, U.S. equities when market volatility returns – and it will. However, investors would be wise to consider sectors that have historically performed well when the Fed gradually tightened, and to diversify by not focusing just on the U.S. Large Cap asset class alone (i.e. consider allocations to Mid-Cap and Small Cap as well) and to not assume that Growth will always outpace Value, especially during extended periods of heightened volatility and low comparable yields.
