January 15th, 2019
December was a tough month. The entire fourth quarter was complicated in fact. That is an understatement, as by the close of the year, most every index turned from respectable numbers to the negative. The question we asked ourselves and other analysts consistently was, “Is this a normal correction or the start of a recession?”
The last thing we want to do as patient investors seeking growth with a reasonable amount of risk is to sell into downturns. The opportunity lost by sitting on the sidelines can be as great or greater than participating as the market endures volatility.
The beginning of the year has been off to a good start, albeit with more intra-day volatility than one would like. Most of that is attributable to the noise; there is a lot of noise out there.
We need to back up a bit and see the forest for the trees and separate the many drivers of the economy and likewise, the equity markets. Here, we tend to believe earnings leads the pack. And the impact of tax reduction has yet to run its full course on corporate income statements. In a general sense, this will lead to strong, if not stronger than expected earnings moving into 2019.
The past few weeks provided a nice reminder of why making portfolio adjustments based on current events is not a prudent investment strategy. We saw a record-length government shutdown, the Mueller Investigation eat up copious amounts on headlines and air-time, the UK’s rejection of their Prime Minister’s Brexit deal and a continuing trade war with China with leaks and details released showing things may be even further from resolution than we would all hope. All these topics were discussed at Holiday Parties around the country and credited for driving the turbulence we saw in December. However, stocks across the globe have gained ground in January. Again, the reminder here is that trading based on headlines is a losing strategy.
We still favor dividend growth as a lead theme in our equity portfolios. It has served us well in the recent past and looks like it is where we want to be with our core equity exposure right now. Last year, this style worked well into the 4th quarter, but like most everything else, lost in December. Fortunately, our gains going into the period gave us a bit of a head start as things begin to rebound. We think this is more a corrective movement in the market than an impaired capital issue, and the recent bounce back appears to be on track. But again, market movements are not measured in weeks, so we must be patient.
At some point the US will have a recession. But none of the data we’re looking at suggests a recession will start anytime soon. In turn, we think profits will continue to grow and that even at the current level of profits, US equities remain cheap.
I overheard a conversation the other day where someone was explaining to the other what a “FANG” stock was. Interesting. First, FANG isn’t a stock. It’s an index (or even an ETF) comprised of Facebook, Apple, Netflix and Google. When people talk about this, I know the average investor still has the switch flipped to “greed” not “fear.” We do not want to disturb what we believe are properly allocated portfolios when the market is in exuberance in either direction, and so while December cannot be far from our minds, looking forward, we think the economy is growing, people are working, and companies are making money.
We need to constantly discern the message from the noise. As such, we are mindful of the economic landscape, watching interest rates (which we do believe will continue to rise) and try to make money while managing each of our clients’ goals and objectives and appetite for risk.
Please call us if you would like to discuss your personal financial plan or speak with us about any other topic that is on your mind. We thank you for your trust you have placed in us and we will continue to work hard to make your financial goals a reality.
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