By: JNBA Investment Committee

Global markets sold off sharply on Thursday (continuing the late session decline from Wednesday), as actions by the Federal Reserve, concerns over global economic growth underscored by slowing growth in China, fear about the financial and economic state of the European Union, and credit downgrades for several prominent U.S. banks drove a flight to quality. The result was a sharp rally in long-term Treasuries and a strengthening of the U.S. dollar at the expense of stocks and precious metal prices.

On Wednesday, the FOMC had announced “Operation Twist” in which it sells its shorter term bond holdings and buys longer term bonds in an effort to reduce intermediate to longer term rates. While the Fed hopes that this will provide adequate support to housing and spur capital investment, it was viewed by many as the “minimalist approach” with investors fearing that it was an inadequate response, contributing to the ensuing selloff. This was essentially the first time that the Ben Bernanke Federal Reserve had not gone beyond the expected course of action in providing stimulus, leaving many on Wall Street disappointed with the action, contributing to the substantial two-day decline of the major indices.

Despite reasonable valuations for stocks, the JNBA Investment Committee for the near term is sticking with our defensive posture which we began in late 2010. We favor the use of broadly diversified portfolios that have stocks underweight in favor of lower stock market correlated “alternative” strategies. This should continue to mitigate some of the day-to-day volatility. Should we begin to see improving trends in stock prices, firming in lower grade bond markets, and stabilization in European credit markets, we will likely look to be opportunistic in stock market based asset classes that offer good value after the selloff and have firmer underpinnings than the current daily volatility has presented.

While the past several months have been challenging for markets and investors, entering this period of time with well diversified portfolios has helped reduce the market’s impact. When credit markets appear less stressed and equity markets begin to show signs of firming we will look for opportunities to increase stock market exposure. For the time being we will continue to monitor fixed income markets in the U.S. and Europe for signs of improvement and leading economic indicators for signs that the current economic weakness may be bottoming.