It's NOT the time reduce risk profile of assets

Note: After a hiatus, I am back. Hopefully, this time, I’ll remain committed and regularly engaged. But we’ll see because only time will tell.

The issue de jure in today’s market is whether it’s the opportune time to decrease the risk profile of an investment portfolio. Risk has paid off handsomely in the past 2-3 years. Small caps stocks have outperformed large caps stocks. High yield bonds have outperformed investment grade counterparts. Emerging market assets have generally outperformed developed countries’ assets. If one wants to pin-point the date when it all started, it would be around April 9, 2003 when Baghdad fell to the U.S. forces and the worst case scenarios about protracted ground war, the use of weapons-of-mass destruction or a refugee in a grand scale did not materialize. Although that date formed the inflexion point for a bull market, a solid foundation in the form of loose global monetary policy has been laid for sometime. The Fed commenced that process by lowering rates in January 2001.

That was then. What about now? The Fed started raising rates in the summer of 2004 but others have not followed suit (see the chart). Japan chugs along on its quantitative easing policy, while the ECB remain reluctant to raise rates given the lackluster performance of its core economies. Australia, Canada, and England raised the rates much earlier than the U.S. but are in the process of reversing them. Even when short-term rates are rising in some countries, long-term rates generally remain at the low levels - i.e. spreads have compressed. If interest rates signifies the availability of liquidity in the global marketplace, then there is still plenty to go around. Given that the stock market performs well during the fourth quarter (see the chart), and stocks are considered a risky asset class, it might be too early exit out of the high-risk assets.