Further to our last call for rebalancing the portfolios, we have delayed the rebalancing exercise due to the persistent weakness in the markets over the past weeks. Such market conditions do not provide a suitable opportunity to rebalance. We see the current weakness as a market correction rather than the start of a bear market; we would like to wait for markets to recover somewhat before proceeding to adjust the portfolios.
Correction, not bear market
The recent market action feels worse than it actually is due to the long losing streak. Nonetheless it is in line with corrections we have seen since the bull market that started in Mar 2009.
Figure 1: Movements in S&P 500 index
The current selloff has been triggered by poor economic data as a result of a slowing economy. Despite the economic slowdown, there are reasons to suggest that the odds of a recession remain low.
Corporate profits in the US economy continue to rise. This provides an incentive for businesses to expand and for entrepreneurs to initiate new business ventures. It is such activities that prolong the growth cycle. Hence, it is difficult to envisage a recession while profits are still rising.
Figure 2: Corporate Profits after tax
Furthermore, the recent decline in oil prices provides relief to consumers and businesses, reducing the odds of declining profit margins and hence recession risk.
Figure 3: Index of Crude Oil Prices
After the initial slowdown, economic growth is expected to pick up again when the benefits of lower energy prices and the lure of profits feed back into the economic system. When the news starts to turn positive, markets can begin to rally again. That could provide us with the opportunity to rebalance the portfolio.
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