Tuesday, August 16, 2016

Stocks drop today, as would be expected

After a Fed member's comments about the possibility of an interest rate rise in September, the U.S. stock market declined in a predictable and controlled manner.  Interesting bright spots in the market even after the recent rise to new highs, not inflation adjusted, still remain.  They are emerging markets stocks which after three recent dull years, at best, have begun to move up in the last month and a half.  Also small cap and medium cap stocks, aka extended market stocks, have been moving up modestly, now noticeably, since February after lagging the large caps in recent years.  Looking at these two areas may present opportunities, although here skepticism will always remain about the ability to choose emerging market stocks or indexes, while a mild resurgence in the extended market is seen as an opportunity.

Now is not too early for large institutional firms to begin looking at harvesting gains for the year to establish a base for strong performance.  For example, Johnson and Johnson has had a substantial run-up over the past two years and remains attractive.  But the run-up may mean that the stock is out of line with its intended allocation.  A fund manager may sell some part of that position to lock in gains, and simultaneously buy another strongly capitalized stock with decent earnings growth and dividends, like 3M or Merck or many other names.  Waiting for the fourth quarter to make changes is not the easiest time to do so in some years.  Declines in strong stocks may happen for portfolio management reasons.

One of the hardest things for some investors to do, raising my hand, is to sell parts of positions in stocks that are performing well and have large gains for the tax man to pursue.  It is a chore that is unfortunately necessary at times.

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