We entered 2016 hedged with almost 30% cash in our tactical U.S. equity portfolios. Since, the market has declined -8%. This negative start has improved our valuation metrics which in turn switched our market exposure model to a more bullish position.

Economically, we remain in a strong environment. The U.S. economy is growing, wage growth is improving, and the labor market is healthy. Concerns in China? Yes, China’s growth is decelerating but the correlation between U.S. stocks and Chinese stocks is low. Consider, from late-2014 to mid-2015, the Chinese stock market ballooned over 117% while the S&P 500 advanced just 7%.

Fear, as measured by volatility, is hitting high levels not seen since August of last year (2015). And thanks to the recent decline, valuation levels are the most attractive they’ve been in years. It’s important to understand that short-term volatility spikes are typically followed by quick rebounds, especially when the underlying data is positive, as it is today.

We know the recent market move is disconcerting. But it’s vital to stay disciplined. Our goal as an investment manager is to differentiate between short-term corrections (5%-15%) and the bear market risk (20%-30%). Our data indicates the former. We view this as a time to add money and take advantage of the discount the market is currently presenting.

Consider the two most recent 10%+ price declines… October 2014 and August 2015. Both instances displayed quick, rapid market declines coupled with high levels of fear and uncertainty. In both occurrences, our outlook remained bullish, and the market rebounded. To place the current market landscape into perspective, we encourage you to read our published research during each of these two recent declines.

Click here -> October 15, 2014 Market Update

Click here -> August 26, 2015 Market Update

 

Graph Source: Yahoo! Finance. Data provided by Bloomberg.