Barry James: At this time, we are about evenly split between stocks and bonds, but we will shift over time as opportunities present themselves. We can go from 90% in stocks to 90% in bonds. However, we move slowly as we adjust to the risks and opportunities we see in the markets.

At James Investment Research, we do our own research because we want our clients to have “peace of mind” about their investments. Preserving capital is always paramount in our mind but we also strive to grow our client’s assets in a prudent, risk-adjusted fashion over the long term. Over time, we expect that there will be opportunities in the stock and bond markets. We have developed over 100 stock and bond market indicators to help us identify those opportunities and take advantage of them for our clients.

MutualFunds.com: We saw a recent spike in bond prices taking us back below 2% in the 10-year note for a couple of trading days, but we have since slipped back in the 2.25%-2.50% range. What is your outlook for bonds in the near-term and do you expect to see investments in yield-oriented plays such as dividend stocks continuing?

Barry James: Our indicators were favorable for bonds earlier in 2014. In fact we have been calling 2014 the “Year of the Bond.” Long term bonds had actually outperformed stocks. However, our risk analysis shifted after the rally you mentioned. We believe the bulk of the advance in bond prices is behind us and we decided to take some gains and lower risk in the bond portion of our clients’ portfolios. We have positioned our clients’ bond allocation in a conservative manner, lowering the volatility in our bond holdings while still allowing them to participate in any other bond rallies.

MutualFunds.com: Are you finding it harder to find value in the markets and what sectors do you continue to see fairly priced?

Barry James: We are fond of the old stock market saying “There is always a bull market somewhere.” We relish the opportunity to be contrarian investors because often that is where the best bargains can be found. Recently, Energy stocks have lagged the overall market. Within the Energy sector we would favor refining companies as the price of oil is low enough to boost their profitability. The Finance sector may also continue to benefit from low interest rates as their cost of funds is still low. We would also favor companies that have a track record of returning cash to shareholders by buying back stock and paying dividends.

MutualFunds.com: As well, are you finding particular sectors getting more unattractive and what are the negative catalysts occurring that may be giving you pause?

Barry James: The technology sector has traditionally suffered when the U.S. dollar has been strong. We would also be cautious of companies with a large portion of their sales coming from outside the U.S. This would lead us to start researching more small cap companies. Most of their revenues are typically earned in the U.S.

MutualFunds.com: Not that anyone is ever rooting for markets to sell off, but do you think we will ever see a natural market correction take place without any sort of Federal Reserve intervention?

Barry James: Our research showed that stocks advanced by about 20% on an annualized basis during periods of recent Quantitative Easing (QE). They also declined about 20% on an annualized basis without QE. Since the Fed announced that they would end QE, stocks have been holding up pretty well, although this could change. What we find even more concerning at this time is investor sentiment toward stocks. If you look at the amount of Margin Debt outstanding, the number of Wall Street buy recommendations compared to Wall Street sell recommendations, and the American Association of Individual Investors survey, these are all showing high levels of bullishness for stocks. After 3 years of little in the way of volatility, it would be normal for the market to have a sell off. We believe the Fed has moved beyond a stock market focus and won’t try to bail it out. However, if the economy falters, they have proven they can be quick to try and stimulate.

MutualFunds.com: What are the main themes investors should pay attention to as we head into 2015?

Barry James: We think investors should be reducing their expectations for future returns in stocks and bonds. Historically high starting valuations in stocks and historically low starting yields in bonds are headwinds to future returns. We believe that active management, as opposed to the current trend toward passive management, should be favored. Obviously, a market with more volatility will favor active management. We also think we will move away from the narrow, large cap focus to a broader, yet more selective approach to finding winners in the stock market.

DISCLOSURE:The views and opinions expressed in this article are those of the authors, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.