Since the stock market started to decline in late April, I have been telling readers of this Foxhall Global Outlook that we were experiencing a normal and healthy stock market correction—and that is what it has turned out to be.
According to various media sources and industry reports, many investors pulled their investments out of the stock market after it dropped 6% or so in late April and early May.
That was a serious and costly mistake!
The markets have now fully recovered and all those investors who pulled out of the market are now stuck with substantial losses that will be hard to make up.
Trying to “time the stock market” during the normal up and down corrections within a bull market is almost always a “fool’s errand.”
Thoughtful investors need to put these bull market corrections into some perspective. There have been seven other drops of 5% or more in the past 27 months without the world coming to an end. And after each of those seven corrections the stock market went on to make new highs.
Warren Buffett’s Advice
When people are making irrational decisions with their retirement investments based on emotion and what direction they think the stock market is heading, I am always reminded of Warren Buffett’s advice. He said that it only takes two things to succeed as an investor—first having a reasonable investment strategy and second, sticking to it—and it’s the sticking to it part that many investors struggle with.
Foxhall’s Dual Investment Strategy
We believe that one of the main ways to navigate this brave new world is first, with the Foxhall’s Dual Investment Strategy. It keeps investors largely invested during long-term bull markets and once a long-term bear market is identified, moves investors out of stocks and into cash, treasury bonds or other investments that attempts to protect principal.
Second, we believe that every portfolio should have a significant exposure to commodity and commodity producers like oil, gold and other precious metals, in order to try and protect clients against unforeseen and unpredictable “Black Swan” disasters and seek to protect the purchasing power of client accounts against the ravages of inflation.
At Foxhall, we were able to take advantage of the correction last month in commodity prices by raising commodity exposure from 10% to 16% of the equity allocations.
We believe this change will help our clients navigate future corrections with a higher margin of safety in our sometimes fragile and uncertain economy.
In the last issue of Global Outlook I said, “While it is impossible to predict the future, in a month or two, investors may very well look back and see this stock market and commodity pullback as a good buying opportunity.” That is exactly what it turned out to be!
Investors Need To Differentiate Between Fundamentals & Political Issues
Currently, most analysts see this summer’s problems with Japan’s recovery from the earthquake, tsunami and nuclear crisis, the European financial crisis, politicians “playing chicken” with the debt ceiling vote, as short-term transitory problems that will be solved one way or another over the next couple of months.
Investors should remember they cannot directly invest in the U.S. Debt Crisis or in the European Greek bailout. Investors can only invest in stocks and bonds.
It is important to be able to differentiate between short-term political issues that are negatively affecting the stock market and the underlying fundamentals of a particular stock.
Basic Stock Market Fundamentals Are Turning Up
Here is what the long-term fundamentals of the stock market tell us now:
Where Will The Stock Market Trend Through the End Of 2011?
We could see some significant nervousness in the market as the republicans and democrats “play chicken” up to the very last minute before they have to vote to raise the U.S. debt ceiling. This artificial political drama could cause great anxiety in the stock market as newspaper and TV pundits publicly worry about the U.S. government defaulting and causing a major global economic crisis. There will be a lot of “the sky is falling” rhetoric!
As Winston Churchill once said, “the Americans will always do the right thing, after they have tried everything else.” As usual, there will be an 11th hour last minute “face-saving” deal and our brave politicians will declare victory by raising the debt ceiling once more.
Again, this is another artificial political crisis and investors need to ignore all the noise and focus on company and economic fundamentals that ultimately drive the long-term stock market trends.
The Bull Market Trend Is Firmly In Place
The bottom line is that analyst estimates for S&P 500 company profits for this quarter are expected to be up 15%. Overall profits for 2011 are expected to be between 13% and 15% with most of those profits coming from Asia and other emerging markets.
While it is impossible to predict the future, I believe the stock market will end the year with double-digit gains. Foxhall’s proprietary Trend Identification Technology affirms the persistency of the long term uptrend and is directing the equity allocations to be near fully invested. Nervous investors might be assuaged with a reminder that the trend analysis is done every day!
So to Warren Buffet’s advice: Foxhall executes a thoughtful investment strategy. Knowing that Foxhall’s Trend Identification Technology and ‘dual investment strategy’ seeks to provide solutions for good markets and bad, should provide investors some assistance with the challenge of sticking to it!
Disclosures: The opinions and portfolio information provided in the Foxhall Global Outlook are subject to change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security. Client accounts may differ from model allocations due to many reasons. All investment strategies offer the potential for loss as well as gain. Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing. Past performance is not a guarantee of future performance.
Foxhall Capital Management, Inc. is a registered investment adviser with the U.S. Securities and Ex-change Commission (SEC) under the Investment Advisers Act of 1940. The firm is defined as the Foxhall Capital Global ETF, 401(k) and Stock Series divisions, which manage a variety of ETF, 401(k) and Stock strategies in bundled fee and non-bundled fee accounts for primarily U.S. clients. The firm was redefined as of 12/1/08 due to the creation of the 401(k) Series division. A complete list and description of all firm composites and their compliant presentations are available upon request.
Foxhall Capital Management, Inc. claims compliance with the Global Investment Performance Standards (GIPS®). Foxhall Capital Management has been GIPS verified for the periods 12/31/99 – 12/31/08 by Beacon Verification Services. The ETF Series composites have received a performance examination for the period since inception through December 31, 2008. A copy of the verification report is available upon request.