Where is this market going?
The market has been on an up trajectory since March of 2009. A very long time for a bull market. Now might be a great time to exercise caution, let cash build in your portfolio and re-evaluate your goals for the coming year. We believe that this year’s performance in the domestic (US) markets will be very difficult to repeat next year. What are some areas to consider? We like European markets over the US for next year and we continue to look to emerging markets going forward. Not that these two areas will not have volatility or will be immune to a setback, its just that we feel there is better value there in the case of Europe as they are a bit behind the US in terms of recovery from the financial crisis. As for developing markets, we believe that much of the growth of the coming decades will not be from the US or Europe but those countries that are less mature than US, Europe and Japan.
What about bonds?
It is going to be even harder to make money in bonds in the coming year as the Fed will likely raise interest rates in December and 2 or 3 times next year. Rising interest rates are generally not good for bonds. Areas to be cautious are high-yield bonds, corporate and government bonds with longer maturities (the get your money back date so you can go invest elsewhere), for more than 10 years. We love CA municipal bonds for those who live in California and for many of our clients especially those in higher tax brackets, but the on again, off again tax reform has whipsawed the municipal bond market. It is a bit of a wild ride for an area of the market that has often been pretty sleepy. There is no simple answer here but to summarize, lean toward shorter maturities and higher quality for the foreseeable future. Venture into CA municipal bonds carefully and try not to pay too much for yield. We recognize it is easier said than done.