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Prepping Portfolios to Weather What’s Next 

Kristina Hooper 

The Upshot 


September’s a good time to take the temperature of the markets, our risk tolerance and our investments. Warming up to risk assets could stave off a cold spell for your portfolio, writes Kristina Hooper.

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Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

While summer’s not technically over for a few more weeks, most of us consider Labor Day the end of the season. Vacations have come and gone. Kids are headed back to school. And the office is bustling again. It’s a time to refocus our efforts on meeting goals for the year and prep for the homestretch. The start of September, not unlike the start of a new calendar year, presents a perfect opportunity to reassess our portfolios. Specifically, investors should take a look at how well positioned they are for the current environment, what the potential risks are and the status of their longer-term goals.

Before taking stock of their investment affairs, they need to sift through the noise of the past few weeks and understand the current state of capital markets and the economy:

Stocks are still poised for a solid year. Equity markets have risen so far this year, with the Dow and S&P 500 posting double-digit gains, but well below highs for the year after a considerable pullback in August. We wouldn’t be surprised to see continued weakness in the near term, but we anticipate that by year end the S&P 500 will be back around 1700.

The global economy is showing improvement. In most regions, including the United States, conditions are strengthening, although that hasn’t been fully recognized yet. In particular, earnings revisions are increasingly diverging from economic indicators. This scenario is unsustainable. We expect earnings revisions to improve now that we’re beginning to see stabilization in GDP growth expectations in developed markets. An upward revision to second-quarter GDP growth should help hasten this trend, which should bode well for stocks. In addition, stocks are looking more attractively valued after the August pullback: the current 12-month forward P/E ratio on the S&P 500 is 13.9, which is below the 10-year average of 14.1.

Catching Up Chart

The housing market is showing signs of weakness. Clearly, rising interest rates are dampening the appetite for mortgages. While refinancing activity has been far more negatively affected than initial purchases, we could see a bigger impact on home purchases if rates rise significantly higher. We need to follow this closely because a derailing of the housing recovery could have serious implications for consumers. While sentiment remains positive and has improved recently, it hasn’t translated into robust spending.

Investors must also recognize three key potential risks to their investments:
A budget impasse in Congress. The most recent projections show that the United States will hit its debt ceiling in October. With word that the president will not negotiate with Congress in order to obtain an increase in the limit, we could be in for a battle royale this fall that could severely shake capital markets.
Instability in Syria. Fears that the United States will attack Syria abated over the weekend but could flare up again. In addition, even without US intervention, instability could send oil prices higher, which could deflate consumer sentiment and impede consumer spending.
A substantial tapering in September. A “tiny taper” seems to already be expected by investors; however, if it’s larger than a $10 billion cut to bond purchases, it could rattle markets—at least over the shorter term.
Looking ahead, all eyes will be on this week’s jobs report, which will give us clues as to what the Fed will do later this month. Our view is that unless the employment number is bad, which is unlikely, tapering will begin in September.

However, as with New Year’s resolutions, investors should be thinking longer term. Despite the Fed’s plans to end QE3 by next year, we will remain in an environment of financial repression for years to come. Coping with financial repression calls for investors to reduce their allocation to low-yielding investments and boost their exposure to riskier assets. This may mean some portfolio alterations, since investors seem to be adding to their cash positions rather than moving out on the risk spectrum. We believe equities offer a favorable risk/return profile compared to other asset classes. So investors with long time horizons should view stock-market weakness as a buying opportunity.

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The Standard & Poor’s 500 Composite Index (S&P 500) is an unmanaged index that is generally representative of the U.S. stock market.

Gross domestic product (GDP) is the value of all final goods and services produced in a specific country. It is the broadest measure of economic activity and the principal indicator of economic performance.

Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.

A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.


Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585,, 1-800-926-4456.


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