Global Stocks: Where To Next?

One of the benchmark indices we use to measure global equity market stock performance against our (High Rock)  blended portfolio performance is the All Country World Index (ACWI). The ACWI, if you recall, is an index with  over 2400 constituent companies domiciled in 24 developed countries and 23 developing countries. A good representation of the global stock market. Using the ACWI ETF as a proxy for this index, since the beginning of February this index (chart above) has continued to face periods of higher trading volume selling every time it attempts to move higher and selling follows. 

US stocks make up over 50% of the ACWI.

A similar pattern has evolved with the S&P 500 ETF (SPY):

Trading volume has diminished as the trading range has become more established. In the US, the trading range continues to be prolonged as the markets wait for a multitude of issues to bring more clarity to financial market traders:

(not necessarily in order of priority) 

1) Geo-political developments: North Korea summit, Middle East posturing, global trade and US protectionist developments.

2) Economic growth, Inflation and interest rates: The US Federal Reserve is expected to continue raising US rates and tightening monetary policy, but there are building concerns as to how well the US economy will be able to withstand that pressure. A higher $US and higher oil prices will likely add question marks to the global growth scenario. Record levels of debt (especially $US denominated debt in emerging economies as well as rising US government deficits) on a global scale will make debt servicing more expensive for governments, businesses and households.

3) The debt build-up has been positive for the global economy over the last year or so, but if the economy should stagger under the debt burden, it becomes a potential powder keg as borrowers struggle with debt repayment issues.

If  and when investor's begin to lose confidence, buying support may not hold if selling volumes increase pushing equity prices through the support line. The fact that record amounts of margin (stock investors who have borrowed to buy stocks and equity ETF's) may be called if and when stock prices decline (investors are called to increase the amount of cash put up to borrow stocks), assets need to be sold to raise cash and a snowball effect can occur, as it did in 2000 and again in 2008.

As portfolio managers, we need to constantly weigh the risks inherent in owning any asset class and apportion a percentage weight to owning that asset class in a balanced portfolio. Portfolios need to be re-balanced regularly in order to ensure that assets classes are appropriately risk-weighted. We believed that those risks were high at the end of December and even higher when the market peaked in January and I wrote a blog asking the timely question: Should You Be Worried? An advisor, who is not a portfolio manager, took me to task for that. We are always worried. It is our job to be worried so that our clients don't have to be. They have much better things to do with their time. Proper balancing and re-balancing are a necessity. Just sitting on a balanced portfolio is the big mistake.

Stock prices may go up. That is great for a portfolio with 60% equity ownership (or any equity ownership, for that matter). They may also go down. We think that if they go down, they will go down pretty hard. So we will continue to take proportionate risk. We work for our fee.