Equity markets continued to pull back, with the major indexes losing from 1.6% to over 2.6% for the week. My bellwether, Apple (AAPL), is up 49% year-to-date but did lose 4.49% last week. (As itchy I have been to pull the trigger, I just can’t seem to let Apple go.) Ultimately, the market’s direction this week will be based on earnings, housing numbers, jobs, Europe, and finally China. I do not believe we have seen an end to this correction, and it is likely that any negative news out of Europe will trump earnings. Consequently, I remain cautious.
Big guns reporting earnings this week include Citigroup (C), Coca Cola (KO), IBM (IBM), Goldman Sachs (GS), Microsoft (MFST), and General Electric (GE); however, the wild cards are the weekly jobs report and Europe, as Spain will be auctioning two and ten-year bonds on Thursday. Another poor jobs report or little demand in Spain’s new debt issues could send global markets for a volatile descent.
On the positive side, the Dow is still up over 5.5% year-to date, and I continue recommending taking profits on up market days. Last week, the Fed emphasized that interest rates will remain low for the foreseeable future, leading to renewed interest in fixed-income securities.
Consider iShares Barclays Aggregate Bond (AGG, up 1.06% and a 2.82% yield), iShares Barclays intermediate credit Bond (CIU, up 3% and a 3.6% yield), and the Vanguard Short term Bond (BSV, 0.75% and a 1.83% yield) as alternatives to cash (assume that bond funds offering a higher yield carry more risk). The funds highlighted this week offer a low correlation to equity, which ultimately protect portfolios from further market declines and generate a return in the form of a dividend yield.
The aforementioned funds above were all up last week, ranging from a 0.27% return for BSV to a 0.71% return for AGG. The more aggressive Loomis Bond Fund (LSBRX) recommended in several past updates was down 0.14%, primarily because of its high correlation to equity markets. I currently hold AGG, CIU and LSBRX.
Another conservative but innovative strategy to consider is the family of Putnam Absolute Return Funds,* which is designed to generate 1%, 3%, 5%, and 7% targeted three year returns over inflation measured by U.S. Treasuries. This group has successfully maintained a low level of volatility because unlike traditional mutual funds, the fund manager has the flexibility to purchase an unusually wide range of securities that include a mix of stocks and bonds. An Absolute Return Fund can help reduce a portfolio’s overall volatility while still providing reasonable upside potential.
*Please note that Putnam Investments is currently a client of HealthView Services.