Market Brief - Nov 16th, 2018
Erica Szczech - Nov 26, 2018
As we examined in our last newsletter, the capital markets volatility we are experiencing is consistent with widespread expectations that equities usually have a bounce followed by a retest of lows, before a more durable advance begins.
As we examined in our last newsletter, the capital markets volatility we are experiencing is consistent with widespread expectations that
equities usually have a bounce followed by a retest of lows, before a more durable advance begins. While we don’t know how long this
volatility will last, we have approached the last few weeks armed with our investment approach and long-term thinking. Since the beginning of November, it has been apparent there are three catalysts that could lift stocks from their recent rout:
1. The mid-term elections come in without a blue wave,
2. The Fed adopts a more dovish stance, and
3. A resolution to the Chinese trade situation.
With the mid-term election behind us, investors are looking for signs of further agreements between China and the US at the upcoming G20
meeting, and a less hawkish tone from Fed Chair Jerome Powell at the December FOMC meeting.
Financial conditions are tightening as Fed policy normalization gains traction and global growth desynchronized continues - all eyes are still on China. But earnings growth rates are still strong and revision activity remains positive. Therefore our thesis remains, the US economic outperformance theme is still intact on late-cycle stimulus, and economists continue to highlight very low recession probabilities.
Said another way, although this volatility feels awful and is not enjoyable, and can test the nerves of the most dedicated investor - its important to keep in mind, that this is not 2008 and the current market environment is not a bubble crisis as it was then. At that time, the Fed was bailing out banks, no companies were beating earnings and we weren’t at full employment. The economy now is in significantly better shape than it has been at any other point in the last 15 years. Although this past month has been uncomfortable, its important to continue to look forward and as growth naturally begins to slow, how we manage it, is the key.
Managing volatility makes us look at the basics of asset allocation and portfolio construction. When we design a portfolio, whether it be one
hundred percent equities or bonds or any variation thereof, it’s the tenant of diversification which we build on. As we get used to slower
growth, we believe it is prudent to begin to reduce risk in portfolios.
For those of us who are concerned about a lasting rise in volatility or if you want to be more defensive while maintaining a growth outlook, we begin to incorporate covered calls to protect in this environment. This strategy combined with taking on elevated cash positions will be key as we get into late-cycle phase investing. We have long used Exchange Traded Funds (ETFs) to accomplish this and complement existing diversification.
We will be in touch with you on how to incorporate within your individual portfolios to decorrelate with the markets.
As always, we appreciate your feedback and speak with you soon!
All the best,