– by Chip Sawyer, CFA and Chief Investment Officer
A Westover client recently sent us some market commentary from a well-respected asset management firm. We love reading views on the market, so these emails are always appreciated.
We agree with much of what this firm presented in their newsletter. We agree that value stocks might finally start to perform better than growth stocks and that a recession in the US is not on the near-term horizon – GDP should come in above 2% next year. We are staunch believers in diversification which is why you’ll always see both domestic and international stocks, both large and small caps, and both value and growth stocks. We also know that market timing is rarely a good idea, which is why our tactical allocation decisions involve marginal moves in the portfolio rather than dramatic all-in or all-out decisions.
The Long-Term Investor
This last point is especially important for the long-term investor. When markets are going up, it’s easy to claim to be a long-term investor. The real test for the long-term investor comes when markets are going down. Unlike in 2017, the stock market does not go up every month, or every quarter, or even every year. But if you want to grow your assets at a pace that is greater than inflation, an investor must take on some equity risk. The level of that risk will be different for every investor – we each have our own tolerance for risk. But a portfolio dominated by cash and bonds, while insulated from dramatic drawdowns, is not a solution for an investor looking to maintain their purchasing power. For the long-term investor, quarters like this one present an opportunity to buy stocks at a much more reasonable valuation than three months ago.
For the long-term investor, quarters like this one present an opportunity to buy stocks at a much more reasonable valuation than three months ago.
However, we do have some short-term concerns, namely trade conflicts and rising rates. We’re also listening to economically sensitive, multinational companies that are describing a global economy that is very different than what we’re seeing in the U.S. Unfortunately, it appears that this weak global picture is not convincing the Federal Reserve to modify their plan to finally get the U.S. back to a “normal” interest rate environment. This may, in fact, be the right kind of medicine, but it’s going to lead to market volatility.
How Will Companies Fare in a Higher Interest Rate Environment?
A decade of low interest rates has encouraged companies to issue massive amounts of debt, and we have yet to see how these newly leveraged companies will fare when an economic downturn eventually comes in a higher interest rate environment. Combine this interest rate issue with a deteriorating global trade outlook, a weakening global economy, and a new Congress eager to rein in the President, and we think it prudent to hold a little more cash and little less in equities right now. All our client portfolios are underweight equities and overweight cash. We’ll maintain this positioning until we think it prudent to change.
All that being said, let’s not forget that the U.S. economy is relatively insulated from global weakness because we aren’t as export-driven as many economies. We do not currently see signs of a U.S. recession on the horizon, and stocks have gotten significantly cheaper this year thanks to double-digit earnings growth and the market decline.
The yield curve, while flattening, has yet to invert and the index of leading economic indicators has yet to go negative. So, while we think it best to be a little conservative, we don’t think we’re on the verge of a meltdown like we saw in 2008 or the early 2000s. Rather the market needs to digest a new interest rate environment, and the President needs to act like he wants to be re-elected and find a trade solution. Global weakness should give the Fed cover to pause their rate hike schedule and possibly allow the U.S. economy to extend the recovery into a second decade. We hope to ride out the current squall with a little more cash and hope that all signs soon point to calmer seas in the not too distant future.
This is such a great time of year to appreciate the best part of life—enjoying the company of friends and family. From the Westover family to yours, we wish you the happiest of holiday seasons and a prosperous New Year.
© Westover Capital Advisors, LLC. All rights reserved.