On the defense
In response to signs of slower growth, investors are starting to become more defensively positioned and are growing more nervous about the state of the markets. One way this can be measured is by looking at the VIX Index, a gauge of stock market volatility that is also known as the “fear index.” Until recently, the VIX had been trading close to a multi-year low of 11, signaling widespread complacency. Last week, however, the VIX spiked to 18, which is closer to its historical average.
Stock up on mega-caps
In the present environment, we would continue to suggest that investors overweight equities, but we also think it makes sense to consider a more defensive portfolio positioning. That said, we would be careful about rotating into classic defensive areas of the market such as the utilities and consumer staples sectors, both of which look extremely expensive. We would also be cautious about small cap stocks, which look more vulnerable in times of slower growth and higher volatility. Instead, we would stick with our recommendation to focus on mega-cap stocks (which have recently been outperforming). In fixed income markets, we would also re-emphasize our favorable view toward municipal bonds.
Don’t Give up on Gold
Stocks are not the only area of the market that has been more volatile lately. Investors have witnessed a violent selloff in gold prices over the past couple of weeks. From April 9 through April 15, gold fell by more than 17%, although prices have since recovered a bit (the precious metal is now trading around $1,400 per ounce).
In the near-term, we do not have a strong view about the short-term direction of gold prices and cannot say whether gold has hit a bottom. Determining valuation levels for gold is notoriously difficult since gold does not have a cash flow that can be discounted. Additionally, it is hard to assess supply and demand dynamics since there is very little industrial or practical demand for gold.
Again, hold onto gold
We do believe, however, that there is some benefit to holding small amounts of gold in a portfolio on a long-term basis. As a physical asset and as a historic store of value, gold remains an important source of diversification since it tends to behave differently than paper assets. Further, gold has historically performed well when interest rates are low, as they are today. To the extent that central banks will be maintaining a stance of accommodative monetary policy, this should be supportive of gold prices. Given this backdrop, our view is that investors who are holding gold for its diversification benefits and/or as an inflation hedge should continue to do so.
