Can Your Portfolio Pass a "Stress Test?"

KALAMAZOO, Mich. - March 10, 2015 - PRLog -- Better job growth should be good news for stocks. Instead, the reaction to February's strong employment report was a spike in long-term interest rates and a drop in stock prices. An improving job market could make the Federal Reserve (Fed) less patient, but we believe slow wage growth and low inflation is likely to keep the Fed from rushing to hike short-term rates. Historically, stocks have increased both before and after the Fed started raising interest rates. But stock market volatility has usually increased too, making pullbacks more frequent.*

Do you find daily market moves stressful, especially when prices move sharply? One strategy that can help you stay calm is to review your portfolio now to check if it's still aligned with your long-term financial goals, risk tolerance and current situation. We typically call this a portfolio review, but you may want to think of it as a "stress test" for your investments. And, of course, a good time for a portfolio review is when markets are relatively calm, not when they're rocky.

Stocks, the Economy and Banks on Firmer Footing
Despite the pullback in response to the employment report, the stock market is near record highs, supported by better economic growth and rising corporate earnings. In addition, Apple will join the Dow Jones Industrial Average. The economy has been passing regular stress tests, as the pace of growth picked up in the second half of last year to an average rate of 3.6%. That's well above its 2.2% average in the previous five years. Despite persistent worries about lagging job growth, hiring has picked up, too.

  • Falling unemployment rate – The unemployment rate in February dropped from 5.7% to 5.5%, its lowest rate since mid-2008.
  • Better-than-expected February job growth – The economy added 295,000 jobs last month, well above the expected gain of 235,000, according to Bloomberg.
  • Improving job trends – Over the past three months, the economy has added an average of 288,000 jobs per month, up from an average of 266,000 over the past year.


The nation's 31 largest banks recently passed the Fed's annual stress test, designed to indicate whether they could handle an adverse shock to the economy. And bank lending has increased over the past few months, suggesting that businesses are becoming more confident.

Corporate earnings were up 6.7% in the fourth quarter of 2014, despite obstacles from the stronger dollar, lower oil prices, and slower economic growth in the rest of the world. We think earnings will continue to grow at a modest pace, supporting higher stock prices over time.

When Will Interest Rates Rise?
Despite many signs of an accelerating recovery, interest rates remain extraordinarily low. The Fed is patiently waiting for better wage growth and potentially higher inflation before raising short-term interest rates. Although no one knows when that will happen, we believe improving conditions make an increase very likely in the second half of 2015. Make sure your investments are positioned for rising interest rates.

Reducing Your Stress
Rising stocks are a great tonic for investors. And when markets are calm, it's easy to be disappointed that your portfolio isn't growing faster. Remember, though, that times change, and diversified portfolios – by design – typically include investments that lag behind. While laggards may increase your stress today, they have the potential to help reduce it when conditions change. If you haven't reviewed your portfolio's mix of stocks, bonds, international investments and cash recently, you may need to return to the mix that's appropriate for you – also called rebalancing. And part of rebalancing may include adding lagging investments to your mix. A "stress test" and rebalancing can potentially reduce your portfolio's volatility – and your stress – in the future.

Kate Warne, Ph.D., CFA
Investment Strategist

*Past performance is not a guarantee of how the market will perform in the future.