When the tipping point arrives, how will the market react?

As much as I try to avoid it, my performance is benchmarked on a very short-term basis; month-to-date comparisons in some cases.  So I couldn’t be more of an advocate for long-term perspective.  However, recent price action has caused me to consider the current market direction in hopes of applying that to a more strategic investment structure.

With QE2 ending in June, I can’t help but wonder if we are at a tipping point in anticipation of that date.  On the one hand, you have Bill Gross, who runs the world’s largest fund—PIMCO Total Return.  On the other, you have Jeff Gundlach, whose Doubleline bond fund outperformed all other bond funds in 2010; gathering $4.5 Billion assets in the process.  PIMCO has eliminated Treasuries from its holdings in search for better opportunity—and less risk—elsewhere.  The question he poses is this:  Who will buy Treasuries?  If there is no demand, price will decline.  Unless of course, supply also declines and there is demand.  Gundlach approaches the situation from this angle, “In any kind of deficit cutting exercise, like we are now heading into, stocks are the losers and bonds are the winners.”

Having a limited insight into the operational end of portfolio management, there are more considerations than just investment performance when revising portfolio strategy.  I have to believe that PIMCO’s size is one of these considerations.  Gross isn’t saying bonds will depreciate; but he isn’t not saying it either.  What is certain is uncertainty.  Can we assume that there will be a negative correlation between stocks and bonds over the coming two quarters?  If yes, are we at that tipping point that predicates this summer’s movements?

Through risk management comes return.


This entry was posted in Portfolio Strategy and tagged , , , , , , , . Bookmark the permalink.