Summary

  • The 4th quarter is setting up as a quite eventful and uncertain period.
  • Don’t ignore short term volatility but keep it in perspective.
  • Be mindful of areas of changing market leadership.
  • Consider asset classes and sectors that have historically performed well during previous periods of gradual interest rate increases.

The third quarter of 2016 started with rapid gains in the prices of stocks as concerns over Brexit faded. Following the 3.7% gain during the month of July, stock prices settled into a lull, moving no more than 1% for over 40 trading days. Perhaps this represented the calm before the storm as the fourth quarter is setting up as a quite eventful and uncertain period with U.S. elections, interest rates, oil prices and corporate earnings all drawing investor attention. In addition, while 2016 may prove to be different, the month of October itself has proven to be a difficult one for stock market investors historically. Some of the more noteworthy stock market declines (Exs. October 1907, October 1929, October 1987 and October 2008) have occurred during the month of October, leading some to use the term “The October Effect” to describe this monthly condition. While each of these factors has the potential to move the market and create opportunities, they can also serve as distractions to investors who may feel inclined to make short term decisions that impact their longer term objectives and may not be consistent with their tolerances for risk.

A trader on the floor of the New York Stock Exchange. Photographer: Michael Nagle/Bloomberg

Despite all of the uncertainty in the minds of many investors with respect to the path of interest rate hikes in the U.S., the 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. Investors should be mindful of these areas of changing market leadership as allocations to these areas can provide a degree of diversification to help withstand potential periods of heightened volatility as well as the breadth of asset classes and sectors to assist in delivering risk adjusted growth opportunities.

Additionally, investors would be wise, in our view at Hennion & Walsh, to consider sectors that have historically performed well when the Federal Reserve has gradually tightened, and to add diversification by not focusing just on the U.S. Large Cap asset class alone (i.e. consider allocations to U.S. Mid-Cap and U.S. Small Cap as well) and to not assume that Growth will always outpace Value in all market environments, especially during extended periods of heightened volatility and low comparable yields.

With all of this as the back-drop, I offer the following high-level portfolio management themes for consideration during the remaining months of 2016:

  • Don’t ignore short term volatility but keep it in perspective
  • Consider international equities as part of a globally diversified portfolio
  • Remember that bonds can play a role in income and growth-oriented portfolios
  • Consider alternative allocations, such as Real Estate Investment Trusts (REITs), commodities and foreign currencies, to assist with diversification and return potential

Disclosure: Diversification can reduce, but not eliminate, risk and cannot assure a profit or protect against loss in a declining market. Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.