Equity markets have struggled to a poor start to 2008 due to continued concerns in the credit markets and fears of a recession. Virtually all asset classes aside from commodities and Treasury securities have posted declines this year. However, Kanaly’s equity models have delivered strong outperformance in this difficult market environment. Our three individual stock portfolios (Core, Growth & Income, and Diversified) are outperforming the S&P 500 Index by over 200 basis points through the end of February. This margin has since expanded over the first two weeks of March.
Our relatively stronger performance is due to two primary factors:
- First, beginning near the end of last year, we moved the portfolios to a more defensive position, selling more volatile and economically sensitive holdings in industries such as banking, retailing and technology. We also eliminated our position in a China exchange-traded fund. The proceeds were invested in stocks with defensive growth characteristics in the energy, consumer staples, utilities and health care sectors.
- Second, we reduced our equity exposure by 5% across all models in early February, a move that has cushioned the portfolios during the downturn over the last six weeks.
We expect the market to find strong support near the lows reached intraday on January 23. In the days and weeks ahead, we will be watching for the classic signs of market bottoming action. Should those signs emerge, we will turn more bullish on the market’s prospects.
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