Q3 2019: Investment Commentary
Despite the deluge of, dare I say, predominantly negative developments occurring since our July commentary, we see very little that requires a change in our outlook or our investment thesis today. I stress “today” because some very significant events and headlines will require investment actions and changes in the future. But we do not see any improved profitability by attempting to anticipate those outcomes.
Some of the topics that we are watching, and even more importantly, require our working knowledge include:
– Economic activity and data (which has been showing signs of slowing lately)
– Indicators that have historical significance in foretelling recessions
– The concept of Modern Monetary Theory
– The proliferation of digital / virtual assets
– The mind-bending concept behind negative interest rates (and how they will impact our lives)
– Political and Geopolitical headlines (trade, conflicts, elections, investigations, etc.)
It is worth stating that some of these current topics and events could dramatically change the way the world operates and would have significant impacts on investment assets in the future.
Google Trends offers insight into the collective curiosities or concerns of people. So far in 2019, spikes in the topics of “Recession” and “Modern Monetary Theory” are worthy of notice since both would significantly impact investment asset prices in the future.
Recessions are notoriously hard to predict, take longer to develop than most pundits will admit, and become official usually 6-12 months after stocks have started falling. Not very helpful for portfolio allocation decisions.
Modern Monetary Theory is a political dream scenario and one that could play out in the near future in some parts of the developed world. The concept that developed governments can and should run deficits and print and spend any money necessary to maintain employment and economic activity is likely quite appealing to elected officials. Large deficits and large borrowings by governments would necessitate zero or negative interest rates; and taxes, not interest rates, would be used to fight inflation. The consequences of such action would surely affect how investments are allocated and managed! While there are signs that this concept may be tried, it will unfold relatively slowly and could, at first, have positive impacts on asset prices, before entering a dangerous unknown in later years.
Let me be clear, anticipation of these events should and do call for planning and preparation, but they do not, at this time, call for a change in investment holdings.
Current market conditions
So far, in 2019, the US economy has had a relatively good year, and investment returns in US assets have outpaced most of the world. The global economy is fairly weak. Interest rates continue to decline, raising bond prices, but also generating some concerns over future income for savers. Profits in US companies slowed in 2019 after a robust 2018 that included tax benefits.
For some market watchers, a few notable early warning signs now suggest a possible recession in 2020 or 2021. But the prospect of lower interest rates (in reaction to economic weakness), active government spending and central bank asset purchases suggest allocations to both growth assets and bonds assets remain valid. A tilt toward US assets versus the rest of the world, and a tilt toward value versus growth and a “barbell” of short- and long-term fixed income exposures remain our preferred biases in today’s markets.
A word on Portfolio Design
A “portfolio” is a collection of investments owned for either income or growth purposes. These are the liquid assets portion of your balance sheet. And as part of your personal balance sheet, they should reflect your goals, life intentions and desires. Below is a short list of statements that should be embedded within a properly designed investment portfolio:
My portfolio reflects my purpose(s). The return profile (income and growth expectations) should reflect the purpose (s) of the owner. Purposes can include generating income for retirement, travel funding, generational planning, helping family, supporting a cause, or inheritance for future generations.
I can stay the course through tough times. The risk profile (of the portfolio) allows for fitful sleep and the ability to emotionally “stay the course” over the long run (usually through a full economic cycle at a minimum). This is an extremely important statement; one that emphasizes that the portfolio owner has a financial plan and is confident and secure in the long term outcome of that plan.
This allocation (today) reflects the current opportunities for income and growth. Anticipating possible future outcomes is less strategic than investing for today’s investment realities.
This allocation allows me the opportunity to be “the smart money” when times invariably become more difficult for other investors. This requires an identifiable source of capital that can move into and buy (growth) assets when they are undervalued. That source of capital may be short-term bonds, cash, or CDs.
These statements are crucial to the achievement of lifelong goals. These statements are the result of hard work and diligent planning, and the portfolios that are built from these statements are as unique as the people who own them.
Take the time to review these statements and make certain you can “own” them for your portfolio. If any are hazy or uncertain, schedule an appointment with our team and we will evaluate them together.