Strategists’ ETF Investing Guide For Q4 2012
By TRANG HO , Investor’s Business Daily Posted 09/25/2012 04:48 PM ET
As the adage goes, “bull markets climb a wall of worry.” The robust stock market rally this year took the bears, retail investors and hedge fund managers alike by surprise.
The world’s largest ETF, SPDR S&P 500 (SPY), advanced 16% year to date, while mutual fund investors pulled money out of stocks in favor of bonds and most hedge funds underperformed the market.
What should ETF investors do now? We asked several ETF portfolio managers for their read on the market and their best ETF investing idea for the fourth quarter.
• Matt Reiner, portfolio manager at Wela Strategies in Atlanta with $1 billion under management:
We remain moderately bullish heading into fourth quarter as we think that some certainty created by the election coming to a close will help propel equities to a small rally to end the year.
Interest rates will remain low for the foreseeable future, leading investors to continue searching for yield in Q4 and beyond.
The one area of the market that seems to be stabilizing and finally finding a bottom is the real estate market, which has seen steady improvement thus far in 2012. Through August, Vanguard REIT ETF (VNQ) has appreciated 16.93% when including dividends. But in a time when investors are striving for income and with the real estate market recovering, iShares NAREIT Mortgage ETF (REM) seems poised to continue appreciating in Q4.
Along with benefiting from an improved real estate market, REM carries a trailing 12-month yield in excess of 10%. We believe that pairing REM with VNQ provides a good allocation to the REIT space, while also being able to continue earning a stream of income in this low-rate environment.
• Ronald Lang, principal at Atlas Wealth Management in Philadelphia with $20 million AUM.
As we head into the final quarter of the year, there are three major concerns for the market: the presidential election, the “fiscal cliff” and the European debt crisis. All three have dominated the headlines and have become critical factors in analyst models in determining the direction of the market.
Better than half of the key analysts we track have forecast a decrease in corporate earnings and possibly a 2% or less gross domestic product (growth) in 2013.
If we take the optimistic view on our three key factors and assume institutions and investors will rally behind the presidential victor, the fiscal cliff gets resolved within a month after the election somewhat amicably (at least keeping dividend tax rate at or around 15%) and Europe begins executing a plan to keep almost everyone happy and in the euro, the S&P 500 may rally another 5% to 8% to 1500-1540 by the end of this year.
Another looming factor may be a downgrade on the U.S. debt, but that is fodder for another conversation, as it will be even more difficult to forecast how that may impact our markets if the first three factors are not amicably resolved. Many people will go to cash if this happens.
So we decided to take the optimistic view. Small caps in iShares S&P SmallCap 600 Index (IJR) have consistently beaten the S&P 500 Index over the last five years and should continue that charge. Vanguard Mid-Cap ETF (VO) will benefit greatly from a bullish run.
Keep away from both the small- and midcap ETFs if we do not get resolution or some keen insight to a resolution on our three critical factors. These ETFs will fall harder than the large-cap ETFs and underperform the S&P 500.
• Tahar Mjigal, director of risk management at International Capital Management in Dallas with about $100 million AUM.
Since the June 2012 low, the U.S equity market has experienced a significant rally fueled by investors’ hopes of another round of quantitative easing (QE3) by the Federal Reserve and further easing by the European Central Bank. This rally has challenged many investors that have remained on the side lines for much of the year in anticipation of a market correction.
Despite what many believe are deteriorating fundamentals, markets have pushed higher in response to a combination of worldwide government stimulus and to a lesser extent corporate stock buyback programs that have significantly increased since 2009.
The S&P 500 is attempting to test 1500 — its high set back in 2000 — for the third time. It is approaching the top end of the range of the secular bear market that started in 2000 despite higher unemployment, larger deficits in developed nations, uncertainty stemming from the impending U.S. fiscal cliff, weaker global economic growth, potential Middle East crisis and the ongoing European debt crisis.
For now, however, the market is stable as investors continue to focus on continued stimulus. Governments and central banks around the world are doing whatever it takes to stand behind the rally.
In the near term, we expect the S&P 500 to pull back before moving higher to test the 1500 level early next year, if the Republicans win (the presidential election).
Certain investments are poised to outperform the market and provide less correlated returns to the broad market. These include iShares Nasdaq Biotechnology (IBB), SPDRs S&P Homebuilders (XHB), iShares Dow Jones U.S. Healthcare (IYH), WisdomTree Emerging Market Local Debt (ELD) and iShares High Dividend Equity (HDV).
We remain defensive and are avoiding small-cap funds and international developed markets, where we feel the most downside exists.
• Kathy Boyle, president of Chapin Hill Advisors in New York.
To me this seems very much like 2007. We’re building a top. The market peaked in April, troughed in early June and rallied all summer with little volatility on hopes of more liquidity from the governments. We may have one more push up into September and possibly October, but I think we are more likely to see a significant correction from the 1440 level on the S&P.
Everyone is anticipating more liquidity to keep coming out of the central bank. Piling up debt on top of debt: Does that sound like a good strategy? Would you do that in your own business or life? Of course not.
Yet, we are delaying action on the underlying problems. We need to cut spending. We have trillion dollar deficits, systemic problems with underfunded pensions, health care obligations, high unemployment, a huge slowdown in China, a pending exit of Greece from the European Union and a fiscal cliff.
And those are the “knowns.” What about the unknowns like the recent hurricane, which could have been worse? Israel and Iran heating up. What if Spain exits the EU? All of these things could cause a market implosion.
What Fed Action Means For Mortgage-Backed Security ETFs MBB VMBS MBG
INVESTOR’S BUSINESS DAILY
If the Fed has guaranteed demand for home loans through MBS, or financial products with exposure to cash flows from mortgage loans, should you be buying them too? The Fed hopes to push down mortgage rates and boost home prices to prompt people to buy homes and spend the equity on consumer goods.
For some market strategists, Fed Chairman Ben Bernanke’s plan, announced last week, invokes the old adage: You can’t fight the Fed.
ETFs tracking MBS reacted positively Thursday after Bernanke dropped the QE3 bomb to keep interest rates at rock-bottom through 2015.
IShares Barclays MBS Bond (MBB) — the largest ETF of its kind with $5.68 billion in assets — rose 0.46%. It marked the largest one-day price gain in 13 months. It currently yields 3.17%. It holds primarily 30-year fixed, highly-rated, securities issued by three government enterprises: Government National Mortgage Association (GNMA or Ginnie Mae), Federal National Mortgage (FNMA or Fannie Mae), and Federal Home Loan Mortgage Corp. (Freddie Mac). The ETF settled back a bit on Friday and Monday.
Vanguard Mortgage-Backed Sector Index ETF (VMBS), yielding 1.14%, and SPDR Barclays Cap Mortgage Backed Bond (MBG), yielding 1.3%, also jumped Thursday.
“They will see further price increases, and yield declines, each month that the Fed buys $40 billion worth,” said John Graves, editor of “The Retirement Journal.” “The Fed has guaranteed a market for these securities, as they have for $2 trillion in U.S. bonds.”
Bond king Bill Gross already had put half of his $272.5 billion Pimco Total Return — the world’s largest bond fund — in MBS. The founder and co-chief investment officer at Newport Beach, Calif.-based Pimco told Dow Jones he knew the high unemployment rate and slow recovery would make the Fed provide more stimulus. He believes the Fed’s easy money policy could last for years.
But some market strategists doubt MBS ETFs have much upside potential and say the Fed’s impact will be marginal.
“The mortgage-related portion of the U.S Investment Grade Bond Index is just over $8.0 trillion,” said Wayne Schmidt, chief investment officer at Gradient Investments in Shoreview, Minn. “The Fed program is targeting 0.5% of the total pool of agency mortgage-backed securities. If the program continued for one year, their purchases would equate to about 6% of the total market.”
Mortgage rates are already at 30-year historic lows. If they fell further, they would be a less attractive investment than government bonds, which carry considerably less risk with comparable yields.
The average 30-year fixed-rate mortgage hovers near 3.52% and the average 15-year yields 2.93%, according to Bankrate.com. Theoretically that’s the most yield investors can earn on them. By comparison, 30-year Treasury bonds yielded 3.09% as of Friday. Twenty-year bonds yielded 2.68%.
“Investors still would need some risk premium on MBS, given the nature of the security,” said Matt Reiner, portfolio manager at Wela Strategies in Atlanta.
MBS are subject to prepayment risk that could lead to losses. If interest rates fall, homeowners are likely to refinance to reduce rates.
“The loss comes about because investors only receive par when mortgage holders refinance their mortgages,” explains Keith Newcomb, portfolio manager at Full Life Financial in Nashville. “For instance, 4.5% (yielding) MBS are trading around 108, and when a mortgage inside is refinanced, the owner of the MBS only receives 100. If the owner paid a premium, that prepayment results in a capital loss, and forces the investor to reinvest at the currently lower prevailing yield.”
But banks have been very uptight about lending and there may be fewer refis and prepayments than expected, Newcomb said.
If interest rates rise, MBS prices will fall. But that’s unlikely. “Since the Fed will keep the interest rate low through 2015, the risk of buying these MBS bonds now is the refinancing risk and the leverage,” said Tahar Mjigal, director of risk management at International Capital Management in Dallas. “This could trigger a wave of refinancing.”
Unfortunately, homeowners can’t refinance to take advantage of lower rates if their homes are underwater. As of the second quarter, about 22.3% of properties are worth less than what their owners paid for them, according to CoreLogic. This amounts to 10.8 million homeowners. Another 2.3 million have less than 5% equity in their homes, which is considered near negative equity.
There’s no guarantee the Fed’s plan will do what it intends. QE3 opponents note the Fed already tried to jump-start the economy via QE1 and QE2, which failed by most estimates.
“Loose monetary policy created the housing and stock bubbles of the last decade, the bursting of which almost blew up the economy,” wrote Peter Schiff, CEO of Euro Pacific Capital.
“As someone who bought his first house with a 13% interest-rate mortgage, I have trouble accepting the idea that 3.25% for 30 years is so high that it is making people hold back,” Tom McClellan, editor of the McClellan Market Report, wrote. “It’s probably something else that is giving consumers pause.”
Best ETFs For Each Stage Of Bull And Bear Markets
By TRANG HO, INVESTOR’S BUSINESS DAILY
Posted 03/19/2012 05:35 PM ET
History has shown the stock market and economy moves in cycles that repeat themselves over and over.
Understanding the different stages of the economy, and bull and bear markets, can help guide your investment decisions, says Tahar Mjigal, director of risk management and technical analyst at Dallas-based International Capital Management Corp., which has $100 million in assets under management.
In his book, “Tactical Management in the Secular Bear Market,” Mjigal explains which exchange traded funds are most profitable during each stage and where we are in the market cycle.
IBD: What are the different stages in the economy and the stock market?
Mjigal: There are four economic stages:
1. Economic slowdown, in which the unemployment rate rises and GDP (gross domestic product) growth ranges between 0% and 3%.
2. Recession, in which GDP contracts for a few consecutive quarters.
3. Recovery, when the economy is fragile but improving.
4. Expansion, the normal state of the economy.
The economic cycle lags the market by six to 12 months. A complete stock market cycle consists of six phases. Four within the bear market and two within the bull market.
1. Peak: the bubble sector begins to show signs of trouble, the market forms a topping pattern like double-top or head-and-shoulders, the S&P 500 volatility index, or VIX, rises and the recession-sensitive sectors like retail, emerging markets and financial services begin to show signs of weakness.
2. Distribution: investors sell shares, earnings releases from companies start to disappoint investors, the market confirms a sell signal by failing to cross above its 12-month moving average after a snapback or countertrend rally on low volume and noncyclical sectors such as consumer staples, health care, utilities, U.S. Treasuries and the U.S. dollar are safe-haven assets.
3. Panic: retail investors and money managers are confused and use emotions to control investment decisions, institutions are forced into liquidation, the stock market sells off sharply and volatility spikes near or above historical highs.
4. Bottom: the government assumes risk from the private sectors by bailing out troubled companies and stimulating the economy, the unemployment rate heightens, recession-sensitive sectors begin to rebound, while U.S. Treasuries and the market volatility index begin to roll over, institutions buy stocks while retail investors sell.
5. Accumulation: occurs from the bottom of the market to middle of the bull market.
6. Confidence and speculation: occurs from the middle to late stage of the bull market.
Whether the market brings joy, as with Yelp CEO Jeremy Stoppelman, center, at Friday’s IPO, or pain, Tahar Mjigal has an ETF that can work. AP View Enlarged Image
These last two phases take place during the economic recovery and expansion stage of the economy. In my opinion, phase five began in March 2009 and ended in June 2010, and phase six began in September 2010 and is expected to last through about mid-2012.
IBD: What is a secular bear market?
Mjigal: Technically, a secular, or long-term, bear market consists of a series of declines followed by recoveries and an extended period of base building. Generally, the secular bear market can take place within a trading range such as with the S&P 500 from 1968 to 1982 and 2000 to the present.
It could also be a succession of lower highs and lower lows on the index’s chart pattern, much like the Japanese stock market from 1989 to the present.
Over the past 90 years, the U.S. stock market has been through three secular bear markets that lasted an average of 16 to 18 years. Each consisted of two different forms of bear markets:
1. A normal bear market without a crisis followed by a cyclical bull market recovery.
2. A severe bear market with a crisis followed by a cyclical bull market of similar magnitude.
Each of these secular bear markets was followed by an extended period of aftershocks that lasted five to 10 years, containing rallies and then corrections of 10% to 25% during the base-building period. The economy during this period tends to have higher unemployment and slower economic growth.
I believe the market is in the beginning of the aftershock period of the current secular bear market that began in 2000. I expect it to last through about 2021.
IBD: How can you say we’ve been in a secular bear market since 2000 considering GDP has grown every year since then except for 2008-09?
Mjigal: Due to a series of problems since 2000 — including the technology bubble, U.S housing bubble, 2008 financial crisis, high unemployment, European debt crisis, massive U.S. deficit, unrest in the Middle East and natural disasters — economic growth and fundamentals have mattered less to investors.
All of these problems have left us with a flat equity performance for a decade.
I believe GDP growth and stock market performance are not linked during the secular bear market. The cause-and-effect relationship occurs during the cyclical bull market and in the secular bull market.
IBD: What is a secular bull market?
Mjigal: A secular bull market consists of a series of sequential bull market cycles over a prolonged period. Within this period, stocks are in a strong uptrend and their charts form higher highs and higher lows accompanied by strong economic growth.
There are corrections of 30% or less, which can be sharp and brief or long and shallow but they don’t have a lasting effect on the economy.
IBD: What are the best ETF investment strategies in a cyclical bear and bull market?
Mjigal: In phase one and two of the cyclical bear market: consumer staples, utility, health care, U.S. Treasury bonds and corporate bonds.
In phase three and four of the cyclical bear market: Treasury bonds via iShares Barclays 20-Year Treasury (TLT), volatility ETFs such as iPath S&P 500 VIX Short Term Fund (VXX), inverse S&P 500 ETFs like ProShares UltraShort S&P500 (SDS), cash and the U.S. dollar via PowerShares DB USD Index Bullish (UUP) are ways to position the portfolio defensively.
Within the cyclical bull market in phase five, the government absorbs risk from the private sector and floods the market with liquidity.
A growth and aggressive portfolio model benefits in this phase. I recommend SPDR S&P Retail ETF (XRT), iShares Russell 2000 (IWM), iShares MSCI Emerging Index (EEM), SPDR Select Sector Technology (XLK) and iShares Cohen & Steers Realty Majors (ICF).
In phase six, the market rally is driven by earnings and the fundamentals of the private sector. Quality and high-dividend-paying ETFs are favored in this phase, such as WisdomTree Dividend Ex-Financials (DTN), WisdomTree LargeCap Dividend (DLN) and iShares Russell Midcap Growth (IWP).
2012 ETF Guide: Top Dividend Paying ETF Investments
By TRANG HO, INVESTOR’S BUSINESS DAILY Posted 12/28/2011 05:20 PM ET
Those with weak stomachs or looking for an income stream can consider ETFs loaded with steady Eddie dividend payers as well as some that play currency shifts, TIPS and junk bonds. Our panel of experts shares ideas for 2012.
Gary Gordon, president of Pacific Park Financial in Aliso Viejo, Calif., with $90 million in assets under management.
WisdomTree Asia Local Debt (ALD): WisdomTree Asia Local Debt (ALD): U.S. Treasury rates are trolling record lows. And the sovereign debt crisis in Europe drags on. But Asian nations have sustainable debt ratios and the best economic growth of any region in the world.
With Asian bonds in general, there is no default threat and they have a sustainable payout of 3% on an average maturity of 3.3 years.
Comparable U.S. Treasuries pay a fraction of ALD. And I expect Asian currencies in aggregate will gain roughly 4% on the U.S. dollar in 2012, providing a low-risk shot at a potential 7% total return.
In equities, the European overhang makes it difficult to count on anything other than winning with dividend-producing investments or low-volatility investments. You get both of these with PowerShares S&P 500 Low Volatility (SPLV).
Annual yield of about 3% far outpaces comparable 10-year Treasuries at less than 2% for your income. Plus, there is reasonable expectation of modest growth from the corporations in the index. It won’t be the best performer if the euro mess is patched up and riskier assets catch fire. But a slow and steady fund like SPLV can easily produce 10% with cap gains and dividends combined.
Neil Leeson, ETF strategist at Ned Davis Research in Venice, Fla.
WisdomTree Emerging Markets Local Debt (ELD): Despite the U.S. credit rating downgrade by Standard & Poor’s in August, the U.S. dollar index, which measures a basket of currencies vs. the dollar, has gained 7% since the downgrade. So year-end dollar strength hurt the return on foreign assets.
For 2012 we should see a reversal in dollar strength as the euro zone works out its debt issues and emerging economies start to show renewed strength. A direct beneficiary of this scenario should be local-currency-based, emerging market bond ETFs.
ELD uses 17 emerging market countries that issue local-currency-denominated debt that is available to foreign investors.
It excludes countries vulnerable to economic conditions such as high debt-to-GDP ratios and inadequate foreign reserves as well as those with slow economic growth and high inflation.
Tahar Mjigal, director of risk management at International Capital Management in Dallas, with $100 million in assets.
WisdomTree Equity Income (DHS) and WisdomTree Dividends ex-Financials (DTN): The severity of the euro zone debt crisis is hard to overstate, as is its impact on the global debt and equity markets. Many if not most of the euro zone economies are in a recession.
Even growth of the fiscally healthy and faster growing emerging country economies is slowing in response to reduced demand from the developed economies, including the U.S.
Growth in China is also slowing. Therefore investors are concerned about the odds of a global recession. They’re also concerned about the inability of Congress to reduce U.S. budget deficits and control its skyrocketing debt.
Still, by many measures the U.S. economy appears to be improving. Bond investors find themselves drawn to the perceived safety of government securities.
As a result, the yield on the 10-year U.S. Treasury bond is now about 2%. I nvestors accept the likelihood of low investment returns. Preservation of capital has become the primary focus.
High dividend and deep value equities have benefited from this focus, and we expect this theme to prevail throughout 2012.
The market will likely continue to be highly volatile and reactive to external developments. Many investors will likely avoid risky assets like financials, real estate, commodities, high-beta equities. They will likely invest in high-quality, dividend-paying equities to supplement returns and hedge against market volatility.
I remain bullish on U.S. equities, with overweight positions in high-dividend-paying stocks and income securities. My S&P 500 target is 1350 by May 2012, with some corrections on the way up before ultimately turning lower.
I expect the current equity market uptrend that began on Oct. 4 to continue through May 2012, with volatility. In the second half of the year, we would not be surprised to see a correction.
Mark Grimaldi, chief economist of Navigator Money Management in Wappingers Falls, N.Y., with $125 million in assets.
IShares Barclays TIPS Bond (TIP) and PowerShares Fundamental High Yield Corporate Bond (PHB) : I am looking for 2012 to begin much as 2011 ended. I expect a focus on Europe, low market volume, low interest rates, high unemployment and very tepid domestic gross product growth — under 2% — with a 50% chance of a U.S. recession beginning.
I feel U.S. markets, however, will perform above the overall U.S. economy. It will be the best house in a bad neighborhood.
With this outlook, I have assembled two model portfolios for 2012: one for growth and one for income. Each model has ETFs that I believe will work in harmony with each other to create a stable portfolio in these unstable times.
The income model includes TIP and PHB. The U.S. just reached a 100% debt-to-GDP ratio. This will cause the Fed to print more money. Interest rates are bound to rise.
As the Fed grows money supply, inflation pressures are sure to increase, benefiting TIP.
Many income-starved investors have no choice but to add risk to their bond holdings to get the yield, via PHB, they need to live on.
ETF Investing Ideas Amid Euro Zone Crisis
By TRANG HO, INVESTOR’S BUSINESS DAILY Posted 11/14/2011 06:37 PM ET
• Tahar Mjigal, co-portfolio manager at International Capital Management Corp. (ICMC) in Dallas. Debt-related problems with the PIIGS (Portugal, Italy, Ireland, Greece and Spain) were the catalyst of significant market volatility in August and September. The fear of defaults by Greece and Italy drove investors into their now-familiar “risk off” mode, resulting in a brief period of volatility and converging correlations similar to that of 2008.
The risk of default by other PIIGS is likely to remain high for several years, which could bring the survivability of the euro into question. At the very least, the makeup of the European nations using the Euro as their common currency is likely to change. Further, other countries in developed Europe are themselves struggling with budget deficits, high debt and a recession.
The recent sell-off in the markets, triggered largely by the problems discussed above, hit the euro zone and emerging markets heavily. Therefore, I believe the likelihood of continued above-average market volatility has increased significantly. Although the long-term growth prospects for select emerging market economies is still intact, I currently favor U.S. equities over emerging market and fixed income because of the following:
1. Emerging countries are raising interest rates to control inflation.
2. European debt crisis and the austerity measures will impact emerging markets.
3. Middle East unrest.
4. U.S. slowdown.
The S&P 500 bottomed Oct. 4 after forming a “W” shape weekly chart pattern. Subsequently, the index rose to approximately 1292, compared to my 1300 price target. I believe the market is likely to rally through early 2012. My target projection for the S&P 500 is 1350 by May 2012, with some corrections on the way up, before ultimately turning down.
The cyclical bull market which began in March 2009 consists of two phases: phase one that started March 2009 and ended June 2010; and phase two that started September 2010 and, I expect it to end early in 2012.
During the past two weeks the S&P 500 broke through its 12 month moving average support level of approximately 1200. While we did not expect a correction of this magnitude and I do view it as possible implication of trouble ahead i do not believe it to be the beginning of a new bear market.
I anticipate the market will experience a series of an ongoing “aftershocks”, resulting from slower economic growth, lower consumer spending, and high unemployment, which could last as long as 7 years. It would not be surprising if some of these aftershocks (i.e.: corrections) were between 10% and 25% with subsequent rallies of equal magnitude.
Presently I believe the market is in a bottoming process that I expect to last another 30 days, most likely to take the form of a W, then the rally will likely to resume through early 2012. My target projection for the S&P 500 is 1300 by early 2012.
Despite the problems that are looming on the U.S economy, U.S equities are still outperforming international equities, as well as the emerging markets. That’s been the case for the last 18-months for several reasons:
- Emerging countries are increasing interest rates to control inflation.
- Austerity measures and sovereign debt problems in Europe.
- The unrest in the Middle East.
US stocks that were considered already cheap have become even better buys as a result of the recent correction. Investors may want to over allocate their portfolios to the U.S equity asset class by buying Mid-Cap to Large-Cap ETFs such as the Russell 1000 Growth Index Fund (IWF) and the Russell Mid-Cap Growth Index Fund (IWP) to participate in the year-end rally.
Analyst uncovers patterns that can predict the stock market
Book shows investors how to manage risk and make money
Tahar Mjigal has analyzed 90 years of stock market history, and he uncovered patterns that repeat without fail – patterns that could help us avoid a repeat of the recent economic crisis.
Mjigal is the director of risk management and co-portfolio manager at International Capital Management Corp. (ICMC) who holds an MBA in international finance and speaks three languages (Arabic, French and English). In his new book Tactical Management in the Secular Bear Market, Mjigal presents a framework for identifying the phases of a bear or a bull market.
“In this secular bear market, managers have to work harder and be more active in the management of portfolios.” Mjigal warns “The majority of people who started investing in 2000 at age 30 or 40 are unlikely to reach their retirement goals utilizing a buy and hold strategy. They’re told that stocks perform well over time, so they don’t worry about market fluctuations. But for many of these people, the market has been flat throughout their career and when they are ready to retire, they may not be able to afford it.”
At ICMC we manage portfolios using the Nobel Prize winning Modern Portfolio Theory in a manner that is adapted to the current market environment.
According to historic patterns, the secular bear market goes through three stages before a new secular bull market begins. The market begins with a normal bear market, followed by a bear market with a crisis, and then goes through a period of aftershocks that lasts for 5 to 10 years. “It’s a long cycle,” Mjigal says. The market right now is in stage two. The last phase of the cyclical bull market that started in March 2009 is expected to end in the middle of election year 2012. Then the market will likely enter a period Mr. Mjigal named the “aftershock period” (slower economic growth, lower spending, high unemployment…). The current secular bear market peaked in 2000 and is not expected to bottom until 2021. “Tactical Management in the Secular Bear Market aims to show advisors and investors how to manage portfolios during this time,” Mjigal says.
About the author
Tahar Mjigal, CPM, is Director of Risk Management and Co-Portfolio Manager at International Capital Management Corp. (ICMC). He holds an MBA in International Finance and a bachelor’s degree in Engineering Statistics and Applied Economics. Originally from Morocco, he is fluent in three languages (Arabic, French and English). You can find him on Twitter, Facebook and LinkedIn and at http://taharmjigal.wordpress.com/. He lives in McKinney, Texas (near Dallas) with his wife Heather.
EDITORS: For review copies or interview requests, contact: Cindy Dashnaw
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When advisors plan to update their asset allocation models, it is very important to align the expected risk and return of the asset classes with a similar market environment from a previous historical period. The period also should be aligned with the cyclical bear or bull market . The problem is that if the asset allocation model is based on the historical return over random periods such as five, ten, or even 15 years, the expected rate of return will not be realistic.
The asset allocation model is based on three important statistics: risk, return, and correlation of the asset classes. In the secular bull market, these three statistics are stable and predictable, but in the secular bear market, they are unstable. Any analysis based on these statistics in the secular bear market without taking into consideration the current market cycle and the projected return will be far from the reality of the actual return.
After researching the past ninety years of market history, I have identified three secular bear markets from 1929 to 1955, 1966 to 1982, and 2000 to the present. Between these secular bear markets, there have been three breathtaking bull market rallies.
In this these secular bear markets, I have uncovered six market phases forming a market cycle within the secular range.
These market phases have been repeated in every secular bear market, including the secular bear market from 2000 to the present. This analysis will explore these market phases in each of the prior secular bear markets, and the catalysts that reverse the course of these secular bear markets into secular bull markets. Based on our analysis, we will project the bottom of this secular bear market and the reversal point that will lead us into a new secular bull market.