The last few weeks have been challenging for the markets as trend lines are being broken, and many speculative issues are reversing to give up recent gains.  After falling 3.7% in January, the S&P 500 has begun February with plenty of volatility and is currently showing losses for a second straight month.  Both domestic and international forces are combining to leave investors unsettled, and it is unlikely there will be any quick solutions to the issues the market is beginning to discount.

On a personal level, the last few weeks have also been challenging as I was admitted to the hospital with an infection in mid January and ended up spending 17 days recovering before I was released to go home.  Unfortunately, it will likely still be another 6 to 8 weeks until I am fully recovered, but I am thankful to be out of the hospital and slowly getting back to work.  Thanks to many of you who have checked in on me and I look forward to being back to a normal work schedule in the weeks to come.

From an investment standpoint, caution continues to be a theme as the recent declines in the market are more likely to be the beginning of a new trend than an isolated event.  Investors who are positioned conservatively risk missing some opportunities to capture profits, but should find their account to be more stable than more speculative investors.  At this point I would rather miss an opportunity or two, than allow my clients to shoulder too much risk and potentially sustain major losses. There are three issues which are particularly concerning to me and seem to encapsulate the risk investors are dealing with today:

1. China Hits the Brakes While China continues to be one of the fastest growing economies, many (including the Chinese government itself) are concerned that a speculative bubble could potentially be on the rise.  In a proactive move, the Chinese regulatory officials have raised the reserve requirements for bank lending, effectively reducing the amount of capital available to lend to businesses and individuals.  While this move is likely a wise decision to curtail speculative lending and borrowing practices, it could begin to weigh down Chinese growth which would in turn become constricting for many other nations as well.  If China is not able to carry the growth torch, there are very few countries which have the resources to step in and take their place.
2. European Debt Concerns Greece has become a ticking time bomb as the country struggles to meet heavy debt obligations.  Unlike the US, Greece cannot simply print its way out of a debt crisis as the country does not have the authority to manufacture Euros.  The global recession has sent tax revenues lower, and a weak financial position means that borrowing costs are prohibitively high (or simply not available).  While many economists say that Greece isn’t large enough to cause a major problem, investors fear contagion where problems spread to other vulnerable countries such as Portugal, Ireland and Spain.  A major disruption in Europe could be a very disturbing catalyst for global markets.
   
3. US Economy Continues to Struggle Despite the fact that headline unemployment dropped during January, the employment picture is actually quite bleak.  Many workers have been unemployed for so long that they have given up looking for work (and consequently dropped off the unemployment tally).  There are a rising number of workers who have exhausted their unemployment benefits, and plenty of part-time workers who are “under-employed” and simply doing their best to make ends meet.  Some estimate that 20% of the US workforce is either unemployed or significantly under-employed and this dislocation is causing economic growth to stall.  Statistics are easily manipulated to look good, but in reality our economic expansion is quite weak and vulnerable to a double dip recession.

So with these concerns on the horizon (or directly overhead) it makes sense for investors to employ risk management techniques to guard against investment losses.  These techniques could include raising cash by selling portions of existing positions, adding short exposure through purchasing inverse ETF positions or shorting individual stocks, or possibly using option strategies to lower account volatility.  If you would like more information about how to implement a defensive investment strategy please fill out an information form for Sound Counsel Investment Advisers and I will personally get in touch with you to discuss how we can protect your account. As always, stay nimble and make sure you have an appropriate plan in place for the current market environment.

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