“He who lives by the crystal ball soon learns to eat ground glass”  Edgar R. Fielder

Personally, I am not fond of ground glass so I try not to rely on my own (or anyone else’s) crystal ball.  Instead, I rely on a defined process to guide my actions.  That process has been flashing a caution signal since late June 2012.  Accordingly, I have remained cautious on the financial markets and on committing capital (cash) to new investment over the last couple of months.

However, the financial markets sometimes have a mind of their own.  In this case, since the end of June the equity market (basis S&P 500) has embarked on a “stealth” rally, rising almost 3.3% despite continued high unemployment and slow economic growth in the US and continued sovereign debt issues in Europe. Even China’s economy is showing signs of slowing down.

I believe there are two reasons for this:

1.       Cash on the sidelines remains at all time highs.  Some estimates put the figure around $2 Trillion.  However, as interest rates on safe investments like US Treasuries remain at all time lows, many  investors, including large institutional investors like hedge funds and pension plans, are being forced to seek yield in the equity market (current average dividend on S&P 500 is 2.13% vs. 5 year Treasury @ 0.63%).

2.       2012 is a presidential election year.  Historically, election year’s are positive for the equity markets, regardless of who wins.  Below is a chart (courtesy of Bespoke Investment Group) which shows the average annual return for the S&P 500 in all presidential election years since 1928. As you can see, 2012 has thus far tracked the long term average quite closely.  If this trends continues,  we should see a pullback in early September, followed by a strong rally from October through the election and right into year end.

Mark Twain is quoted as saying that “history doesn’t repeat itself, but is does rhyme”.  As such, I will incorporate this historical trend in my assessment of the markets for the balance of the year.

Source:  Bespoke Investment Group

Given the economic and political uncertainty in the US, the lingering debt issues in Europe and a myriad of other unknowns, I continue to focus on generating a reasonable return on investment relative to the risk being taken, with a strong emphasis on diversification of assets.

Although the information included in this report has been obtained from sources we believe to be reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

 Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.