Investing In Uncertain Times
October 12. 2018
Our Portfolio Committee meets weekly throughout the year and we have a defined process for tracking investments and portfolios. Investors surely appreciate when their accounts show a higher value and are understandably concerned when accounts show paper losses. We wanted to share with you our thoughts on the current markets. The past week has seen a material sell off in the stock market, triggered by rising bond yields and trade tensions with China. The selloff came after stocks reached yet new highs at the end of the second quarter. New highs are appearing to lead to higher volatility in current markets. In February, the S&P 500 dropped 3% twice during the month and then proceeded to rally again.
After a prolonged nine-year bull market, the markets seem to be looking for bad news. Some fears and concerns are warranted, and some provide an excuse to "take some chips off the table". We construct our strategic portfolios for all types of markets. Over the last week, the new fears are justified not only in the reality of higher rates but also the potential rates to move even higher. We have mentioned in the past that interest rates have been held to artificial, low levels. Rates have been so low for so long that fixed income yields now provide some competition to stocks. This is good for our portfolio construction. The other factor influencing markets is the cost impacts that are emerging due to recent tariffs. Companies are citing higher costs for steel and other materials and meaningfully higher shipping costs. This problem poses a risk for higher inflation if companies cannot absorb the costs or lower margins for these companies.
Below is the performance of the SPDR S&P 500 ETF (SPY) over the past five years. Quite impressive.
This chart illustrates the "drawdowns" (declines from recent previous highs) over the past five years. Note this is the eighth time there has been a correction of at least 5% over the same time period. The largest was on February 11, 2016, when it was down 13.01%.
Even with these concerns, a protracted decline in the market would be more typical if the expectations for a recession were imminent. In this case, the economy is doing exceptionally well and that has not changed in the last week. We have tariff and trade tensions, but no trade war yet. Tariffs are worth watching. Higher bond yields should be expected given long-term averages relative to GDP growth. The economy has been growing for nine years and is showing signs of acceleration. The impact of equity valuations is dependent on two primary factors: earnings and interest rates. We are confidant a strong economy can sustain earnings growth and allow for interest to move towards their long-term equilibrium. We would temper our expectations on the rate of growth in earnings as these price pressures should be increasing over the near term.
For perspective, here is the performance of some common indices over various time periods.
Our experience with the Black Monday crash (1987), Dot-com crash (2000-2002) and Housing & Financial crisis (2007-2009) and other events have formed and continually update our investment philosophy. Having a strategic investment portfolio is important. Within that framework, we make small tactical adjustments as needed. We evaluate our portfolio investments regularly and we remain confident in the long-term strategic design of our various portfolios. One change we will make soon to our portfolios is the repositioning of some growth equities to value equities.
This might be a good time to reassess your risk tolerance. We offer various investment models from Conservative to Aggressive. Our Balanced model, for example, has 40% stocks, 40% income and 20% in diversifiers--strategies that bear a low correlation to stocks.
We will continue to update you with any pertinent information regarding the markets in general and your portfolio in particular. Of course, should you have any questions, please do not hesitate to contact us.
All investments are subject to risk, including the possible loss of capital. This material is for informational purposes only and is not intended as an offer to sell or a solicitation of an offer to buy securities. Trinity Fiduciary Partners, LLC is a Registered Investment Adviser. It provides investment advisory services and does not sell securities. For more information, please call (877) 334-1283.