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Overweight US Equities? Consider Making Some Changes


The balanced portfolio is back.

The obituaries for bonds, commodities, and emerging markets have been written for some time now. Stock market mavens have been pounding the table for you to move the majority of your portfolio to equities because there is no other alternative that makes sense. They decry that bonds are going to implode from rising rates, commodities are doomed to stagflation, and alternative assets are too unpredictable. The 32% gain in the SPDR S&P 500 ETF (NYSEARCA:SPY) last year simply reinforced the notion that US equities are the place to be. 

Old-school Wall Street will tell you that if you aren't in, you are missing out. This has likely led to investors becoming overweight domestic equities and other risk assets as a function of performance-chasing in the later stages of the bull market. Then 2014 came along and changed the game once again. 

As we close out the first quarter of the year, we have seen a significant shift in risk behavior, social mood, and asset prices.  A modest dip in stocks during the month of January was all it took to send money flying back to the safety of fixed income and gold as a shelter from the storm.  Stocks have once again recovered in a resilient fashion, but they are still barely treading water above the flat line on a relative basis. 

In addition, we are starting to see subtle changes in risk behavior as small-cap stock indices such as the iShares Russell 2000 ETF (NYSEARCA:IWM) lag behind their large-cap peers. Investors might even finally be starting to shift their exposure to include beaten-down areas such as the iShares MSCI Emerging Market Equity ETF (NYSEARCA:EEM) as a value play. EEM is starting to show signs of life once again and has the potential for a massive shift in rotation from high-priced domestic equities. 

Some other key areas that have strengthened considerably this year include utilities stocks, dividend-paying technology stocks, preferred stocks, and REITs. Many of these sectors are considered defensive plays that could further support the case for a risk-off environment moving forward. 
All of these subtle shifts are clues that a diversified portfolio with allocations to global equities, fixed-income, and commodities can help smooth volatility and enhance returns over time. The key is being nimble enough to shift in response to changing conditions and take advantage of new opportunities when they develop. 

You should use the end of this quarter as an opportunity to review your asset allocation and make any necessary changes to balance or strengthen your holdings. Don't be afraid to take a wider view of the landscape to include tactical ideas that may develop into new long-term trends. 

Read more from David Fabian, Managing Partner at FMD Capital Management:

Check Out These Areas of ETF Strength Amid the Equity Turmoil

A Look at Performance Chasing and Beta Rotation

Use Market Volatility to Your Advantage

Twitter: @fabiancapital
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