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he recent performance of the
stock market has vindicated the decision we made earlier this year to defer
additional stock purchases and allow the cash position in portfolios to build up
with dividends, interest and deposits to accounts to increase. Even though
our clients portfolios have done almost three times better than the S&P 500
Index in the last 12 months, we concluded that it would be better to wait until
after the May meeting of the Federal Reserve Bank because regardless of whether
the Fed raised interest rates, investors had built themselves up to expecting
what could be termed a perfect statement in which the Fed announced they were
through raising interest rates. We did not believe that would be the case and as
a result, the market would sell off, since investors would be disappointed.
That is exactly what happened
and it was exacerbated by the trouble in the Middle East. That made the decline
last a little longer than anticipated and made an even better buying opportunity
after the dust cleared. At that point, it became evident that the August
meeting of the Federal Reserve would be the next entry point. We are of the
opinion that with the housing market slowing down and the economy cooling to a
2-3 % growth rate the Fed would be just about finished with raising rates. If
the Fed does not raise interest rates in August and we believe there is better
than an even chance they won’t, the stock market is poised for a significant
increase.
Of course, that made a decision
of whether to exit the market after the May meeting a matter of analysis. In
any market decline, there are a number of factors to take into consideration
before executing an exit strategy. First the length and severity of the decline
must be taken into consideration. Then there are trading costs, lost dividends
and interest, capital gains taxes in taxable accounts and the simple fact that
it is almost impossible to get out at the top and in at the bottom.
After all these considerations
it was judged to be not cost effective to exit the market but just use the
available cash to buy securities at the lowest price possible
Kevin J Tierney
Registered Investment Advisor
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