Three important investor events took place last week. Here is a brief re-cap:
Wednesday—The Fed decided not to embark on an additional stimulus program at this time.
Thursday—Mario Draghi’s lofty assurance from the previous week that roused investors from their Elysian stupor did little to spurn any action at the European Central Bank (ECB) committee meeting.
Friday—The U.S. struck gold by creating over 163,000 new jobs in July, which drove the Dow up 1.69% on Friday after posting four straight days of losses.
Speaking of gold, let’s move to the London Olympics for a moment. According to a recent Yahoo sports article written by Martin Rogers, an Olympic gold medal, which is made up of 1% gold and 99% silver and copper, is worth around $650 (excluding future athlete endorsements). Assuming Draghi and the Euro hegemony actually introduce an effective stimulus program in Europe (which is, believe it or not, conceivable), the value of precious metals, especially gold, may likely increase through the remainder of 2012. (Note that gold lost 4% in Q2 and was up 0.65% in July.) Come to think of it, a position in gold may be an interesting addition to Marea’s portfolio.
For those of you who do not leaf through the update on a weekly basis, my wife Marea is currently unsatisfied with her portfolio’s performance because she is holding a significant level of cash, which I have yet to put to work. For the better part of last week, amidst four straight losing sessions, Marea astonishingly refrained from her usual bedtime harangue; however, that all changed after the Friday bell, when she attacked with her usual nimble vigor.
Funny how her tirades always seem to coincide with market rallies.
Next week will be quiet on the macro front, so the focus will be on earnings. Volume is expected to be lower than normal, leading to a greater level of volatility—thus creating potential buying opportunities. As Marea can certainly attest to, I am sitting on more cash today than I have since the first quarter of 2009. The time may have arrived to slowly and cautiously increase equity exposure.
It is important to realize that volatility will not end as we enter the fall of 2012. We have a polarized lame-duck congress; November elections that will determine control of the White House and the new Congress; the U.S. debt ceiling; billions of dollars in mandatory budget cuts that could vault us back into a recession; the potential expiration of the Bush tax cuts, and don’t forget, Europe.
Despite these unknowns, I believe the upside potential does outweigh the risk for growth-oriented investors. Consequently, since my primary objective is to protect year-to-date gains while minimizing volatility, I’ll focus on large-cap funds offering higher than average dividends (concentration in consumer staples, telecommunications and utilities) with a smaller injection of cash into the S&P 500 and gold.
I assume this slow and cautious progression into conservative large-cap funds will finally slake Marea’s thirst for broader returns in her portfolio.
Have a productive week.