*This email was shared with Clients and Friends of the Firm on Thursday, December 27, 2018.
I hope you had a wonderful few days celebrating the holiday. We have obviously been watching the markets closely these past few weeks and while many recent headlines have been discouraging, we want to remind you that we are long term investors that make our decisions with proper planning and asset allocation and we do not use emotion when we manage your assets.
We know that when the news pours in that the Dow has lost 300 or 400 points in a single day, emotion tells us to run for cover. But our portfolio management process begins long before this or the next correction arrives. We diversify the portfolios across industry, company size and geographic location. We prepare for markets to behave “normally” which means we expect to take the bad days along with the good days. And furthermore, each portfolio is built for you – for your time horizon and your appetitive for risk. Remember, volatility is normal; It cannot be eliminated, and it is an enormous part of investing and therefore in order to grow your portfolio, we must deal with it. Volatility does not change one’s appetite for risk and it certainly does not change one’s time horizon.
Here are some of our own (apolitical) observations on what we see driving the swings in the markets.
- Tariffs. The effects of the Tariffs are starting to work their way into supply chains. These should be temporary effects that we expect to work back in a positive direction once the so-called Trade Wars are resolved; we do not expect the current situation to continue indefinitely. Specifically, the tariffs with China were the spark that lit the most recent round of volatility. President Trump, exiting the G20 meeting in Buenos Aires, announced there was a deal and the market shot up; the deal turned out to be less tangible than the market expected, and the markets came down. Talks with China are ongoing and seem, by accounts, to be moving towards a conclusion – we are still very much in wait-and-see with respect to a resolution here.
- Federal Government shutdown. As taxpayers, it is frustrating when our elected representatives seem incapable of performing the job(s) we elected them to do. When the Democrats take the House on January 3rd, they will likely reintroduce the package that was approved by the Senate 100-0 before the shutdown and will leave it to President Trump to decide to keep fighting or to find some way to open the government back up. We do not make guesses on the outcome here so again, we are wait-and-see. Certainly, federal government shutdowns do influence the US economy, but markets in the past have seen growth during these periods.
- Perceived uncertainty vis-à-vis the Federal Reserve & Chairman Powell. President Trump has taken to Twitter frequently over the past few months decrying the Fed’s policy of raising interest rates. The Fed has thus far resisted that pressure, leading to stepped-up attacks from the President on Chairman Powell. In recent days, various administration surrogates have voiced support for Chairman Powell, but as we know, that does not necessarily mean that’s the end of the story, and the markets have reacted accordingly with fear. Regardless of Powell’s position, all 5 Chairs of the Board of Governors have supported this most recent rate raise and will likely continue that policy into 2019. The real question is “how far” into 2019 will rate raises go. The Fed has issued guidance in the past that they are planning on 3 rate hikes (of the same .25% each). Recent volatility will put added pressure to perhaps back off that plan. For the market, whether the Fed hikes or doesn’t is a bit of a double-edged sword, as a rate hike signals the Fed continues to feel the US economy is strong enough to sustain higher rates, while on the other hand, pausing rate hikes, while typically a positive for markets, would signal the Fed’s perhaps less-confident outlook in the US economy.
We often ask ourselves, “What is value?” It goes hand in hand with confidence and perception. Putting politics aside, this is about feeling like things are working. Interestingly, the numbers for holiday spending came out today and we set another record. Some $850 billion was spent by holiday shoppers this season which is a record over the past 6 years.1 This is good news. Our economy is basically doing well. But confidence in Congress, in business ethics and in how we show up on the world stage defined by principals is under question. This will pass. Perhaps our swings are more pronounced today than in prior times, but while no one likes what the market did in December, we do not see this as permanent impairment of capital, unless one sells out. That is not the intent of us here, nor our beliefs that the world is ending.
When the markets enter periods of pullbacks or corrections, we are reminded of one of Warren Buffet’s famous sayings: The stock market is a device for transferring money from the impatient to the patient. We will continue to monitor the markets and act accordingly, but we will not do so emotionally. As always, we encourage you to call us if you have any questions or would like us to review your investment profile and goals with you. We are here to help you and will remain steadfast in doing so. We greatly appreciate the trust you place in us and the confidence you have in our work.
and Rick McDonald
Investment advisory services are offered through U.S. Advisory Group (USAG), a Registered Investment Advisor. Investment Advisor Representatives of USAG may also be registered with PCS, member FINRA, SIPC, and Registered Investment Advisor, as Registered Representatives and/or dually registered Investment Advisor Representatives. USAG and PCS are not affiliated.