Capital Appreciation Or Preservation?

January 19, 2016

You’ve seen the headlines in recent months: Northern Trust projected five years of “tepid” returns last summer; Wall Street Journal’s Jason Zweig pointed out the “cold, hard truth” of an era of low stock returns ahead last spring; and more recently, the Royal Bank of Scotland dramatically made news with its call to clients to sell everything.

The message investors are getting with increasing emphasis is that the U.S. equity returns bonanza we saw after the financial crisis—for about six years straight—is over. So what now?

We asked a few ETF strategists whether investors should focus on capital preservation rather than capital appreciation in the current market environment. Here’s what they had to say:

Gary Stringer, president/chief investment officer, Stringer Asset Management, Memphis, Tennessee:

We think that in the current environment, capital preservation should be more of a focus than capital appreciation. As a manager who combines a strategic, longer-term outlook with a more tactical, near-term approach, we believe in diligently managing risks in real time. This helps to potentially smooth the ride for our investors.

Mixed signals from the indicators we track leave us more leery regarding the U.S. economy and global financial markets over the near term. In fact, we expect the current U.S. business cycle to come to an end over the next 12-18 months. As a result, our portfolios are cautiously positioned regarding equity and credit risk.

While the U.S. jobs market continues to look healthy, the credit markets suggest caution. The yield curve has flattened, investment-grade credit spreads have widened, and market-based inflation expectations have decreased. Combined, these indicators suggest lackluster economic growth ahead.

Previously when these indicators suggested caution, such as in 2011-2012, we were in an environment where the Fed was supportive through its quantitative easing programs. Now the Fed is pivoting to tighten monetary support through raising short-term interest rates. We think that the Fed tightening monetary policy increases the risk of slowing economic growth further, exacerbating head winds to revenue growth and earnings for U.S. corporations.

The globally economic repercussions of these trends are more complicated, but at least as impactful. Therefore, we have reduced our global equity exposure with a tilt toward defensive equity sectors, investment-grade bonds, and cash. These areas can protect principle in the near term and may allow us to have dry powder to use for future opportunities.

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