Is it Time for the Contrarian Bet?

Summary

  • The direction of the financial markets have not really changed that much since late last year, but volatility for U.S. equities is much higher
  • In our view, the risk/reward ratio of taking contrarian investment bets is not favorable right now, but that can change rapidly in the near future
  • A select few sectors are still in a bullish uptrend
  • This is a very dangerous market where increasing the cash allocation seems to be the prudent choice. Sudden and violent moves can happen rapidly in the currency, commodity, equity and bond markets.

Often, the weakest investments from last year can turn out to be the best performers in the next. Since international markets and sectors related to natural resources have fallen tremendously in 2014, it is tempting to take contrarian bets right now and hope to be able to buy close to the bottom. However, whether we like or not, timing can be critical and jumping into a declining investment can have a devastating effect on an otherwise well-balanced portfolio.

When volatility is increasing, it is always useful to take a longer-term view of the direction of the key asset classes. As we can see from the two-year charts below, long-term Treasury bonds are still declining, the dollar is still advancing against a basket of major currencies, and commodities, such as crude oil, are still falling.

Perhaps the most striking feature of these charts is the steepness of the curves. While it is tempting to believe that the direction of the trends is about to reverse in a big way, the reversals have not happened yet, and we simply cannot know if the next rally/sell off will be temporary, or, if it will mark a turn of the long-term trend.

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While the long-term trends for the other three asset classes have not changed yet, U.S. equities have started experiencing increased volatility since November 2014, and now are locked in a trading range. The long-term trend is still up, but the U.S. stock market is on the cusp of rolling over.

spx

Is it time to buy beaten down stock sectors, such as commodities or gold, or jump into Latin American equities? We think that the risks are too high right now, but would not be surprised to see these investments outperforming the market at one point in the future.

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flatx

fsagx

The Wall Street adage says that there is always a bull market somewhere.  The charts below show a sampling of Fidelity income and equity funds that have done exceptionally well in the recent period, and may continue to outperform:

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Read more about investment strategies at FidelitySignal.com

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