The top-down investment strategy continues to be “don't fight the Fed,” according to Dennis Guenther, who manages a total of $2 billion for CLS Investments LLC.
“The markets remain in somewhat of a sweet spot, benefiting from both monetary and fiscal stimulus, the current low level of interest rates and inflation, and improving corporate profitability,” he said.
Mr. Guenther added that “our Great Reflation theme for the third quarter played out well, as emerging markets, basic materials, investment-grade, and high-yield bonds all outperformed.”
He expects investors to start seeing a “tug-of-war” between the positive third-quarter earnings and reports of weaker economic data.
“What that spells is more headline trading and a higher level of volatility,” he said.
Mr. Guenther's strategy is employed in the $590 million AdvisorOne Amerigo Fund (CLSAX), which invests in exchange traded funds.
The fund gained 38.4% this year though Wednesday.
The S&P 500 is up 22.8% over the same period.
Mr. Guenther said he has been taking advantage of the weaker U.S. dollar and the Fed-induced liquidity by investing in international equities, commodities and muli-national domestic stocks.
If the stock market rally is to continue, he said, it will require solid evidence that the economy can stand on its own without the help of such extreme levels of government intervention.
“For the markets to maintain their vigor over the intermediate term between now and the middle of 2010, we will need to see a self-sustaining economic recovery take hold,” he said. “A recovery that is too fast will aggravate the bond vigilantes concerned about potential inflation, while a recovery that is too slow will not be well received by the equity markets.”
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