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AAM Viewpoints – Why should I care about downside protection if the market does not go down?

There is no question an incredible lack of volatility persisted over the course of 1Q2017 (1st quarter of 2017). In fact, there were only three days where the S&P 500 has moved more than ±1%. To put that into perspective, each of the last 10 years has averaged 137 occurrences per year. In such a benign environment, it is very easy for the green-headed monster of greed to emerge and encourage investors to add ever-increasing risk to their portfolios. Let us tame that monster.

Number Days with S&P 500 Range >1%

Source: Strategas

With the bull market in its ninth year, we think it would be foolish to believe we are in the early or even middle innings of the current economic cycle. Until we receive more direction on policy, the list of potential speed bumps for the balance of the year continues to grow longer and includes:

1. More aggressive Federal Reserve policy action

2. Legislative stagnation on pro-growth policies

3. Plateauing/declining loan growth

4. Weakness in auto sales and used-car prices

5. Commercial Real Estate (CRE) default concerns

6. Weak energy prices.

In our opinion, each one of these potential speed bumps should not derail the current economic cycle in isolation, but continued deterioration of multiple factors could fuel cause for concern that the market’s price action today represents borrowed returns from the future. With rising earnings expectations pinned on an improving economic climate, the expectation bar has risen significantly from the “green pasture” days of late 2016.

Coincident with our view regarding “time in the market,” we do not believe an investor can consistently reposition portfolios for periods of market stress ahead of the curve. We believe a prudent investor should always remain focused on what could go wrong and be positively surprised when the markets are accommodative.

Oaktree’s sage founder Howard Marks noted risk-conscious investors must content themselves with the knowledge that they benefitted from risk control in the portfolio, even though it was not needed.

“Risk conscious investors are like prudent homeowners who carry insurance and feel good about having the protection in place…even when there is no fire.”

- Howard Marks, Oaktree | The Most Important Thing Illuminated

 

CRN: 2017-0501-5942 R

Opinions in this piece are those of Bahl & Gaynor and are not necessarily that of AAM.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

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Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.