401(k) portfolio resists market’s slide

It was a dreary second quarter but it could have been worse. My model pension portfolio had less than half its assets exposed to the domestic stock market so it performed relatively well.

Emphasis on “relatively.” While the S&P 500 sank 5.4% in June and 11.9% in the quarter, my model slipped only 3.0% and 8.4%, respectively. That was a disappointment, but the model is still up 18.5% in the last year, which is its first.

Looking ahead, I am not shopping for bargains–yet. The Obama administration, whose bewildering incompetence is responsible for this mess, has barely gotten started. It seems likely voters will toss out the Democrats en masse this October, but enough of them will remain (including Barack Obama himself) to do enormous mischief. It will get worse before it gets better.

That said, my model is designed for the long term. And in the long term, Obama will be politically dead.

Here’s how the model finished June:

Gimme shelter ... from Washington

I say that Obama’s incompetence is bewildering because, let’s face it, the guy is smart as a whip. Unfortunately, he doesn’t know beans about business; he doesn’t have a single businessman in his cabinet or among his closest advisers.

So his trillion-dollar economic rescue plan has been a complete failure. When his “cash for clunkers” program was unveiled, auto sales were at a wretched 7.3 million annualized rate. They shot up when subsidized, but have since collapsed to a 7.0 million rate.

Similarly, new-home sales had shriveled to 400 thousand annually. Obama’s subsidy to first-time buyers pumped them up to 450 thousand, but when the subsidies expired sales collapsed to even more depressed levels.

So U.S. stocks, reflecting the outlook for the U.S. economy, are doing miserably. Big-company equities, as represented in this portfolio, sank nearly 6% in June and riskier small and mid-size stocks were down almost 7%. Both of the portfolio’s foreign-stock holdings, representing companies that are beyond Washington’s reach, were slightly ahead during the month. Gold, which is the ultimate “no” vote on economic policy, was the portfolio’s best performer.

This is going to get worse. (See ‘Market’s sound and fury is signifying something … bad.’) So while U.S. stocks are becoming cheaper, they will get cheaper yet. This portfolio’s bondholdings are higher than they would be in a better market, and the gold mutual fund is a stopgap against Washington’s profligacy.

(God is not an investment; it pays no dividend and indeed bears substantial expenses for storage and security. It is a trade. I put it on recently as a hedge against U.S. political risk; namely, amazing incompetence from the White House to Congress. I’ll take it off when that risk retreats to something better than a Venezuela-level threat. Let history record that Al Franken, who wore a gorilla suit in “Trading Places,” is part of a fillibuster-proof Democratic majority in the U.S. Senate, but it won’t be fillibuster-proof after this October’s election.)

So now, when Washington is so radical, is a time for us investors to be conservative. That means keeping plenty of powder dry in bonds, and building a defensive bullwark of commodities (energy and gold) to protect us against inflation.  

Once Obama is a lame duck–which could become clear as early as this October–the outlook for U.S. stocks will improve. Until then, I’m keeping my head down.