The Big Picture

“I can’t change the direction of the wind, but I can adjust the sails to reach my destination”  

A remarkable statement which recognizes that we are impacted by forces out of our control. However, we can adjust our exposure to help obtain our desired outcome.

One of the best characteristics of the financial markets is liquidity. With ease an investor can make adjustments to market exposures and either add risk or lower risk. We tend to witness two extremes regarding the use of this tool. Investors who are continuously buying and selling nearly all of their investment capital emotionally based on a recent market move, a hot stock, or a feeling. Or, investors rarely ever “adjust the sails” even when there may be rationale to do so.

We are proponents of periodically adjusting risk exposures when there is adequate justification. By justification I mean we have material data, indicators, as well as confirming evidence that there is a high probability that risk may not be compensated with reward.

Have a Plan and a Process!


From the Trenches

The Inflection Point…

An inflection point is a time of significant change or a turning point. For the economy and the markets, evidence is growing that we are at such a point.

We have had several market moving events over the past few weeks. Chronologically:

  1. The initial correction beginning in October was in my humble opinion the simple recognition that global growth is slowing. The International markets have already slowed and we are seeing the evidence of slowing domestically. We will need to continue to monitor this development.
  2. The market found some support through the month of November only to continue the decline largely driven by the Federal Reserve (Fed) announcement of increasing interest rates last week. Increasing interest rates into a slowdown is not a great combination! While there was some expectation that the Fed may defer until next year, that was not to be. The Fed is signaling that they are more concerned about inflation as well as reloading their guns for the next recession than they are about current market levels.
  3. Lastly, we had several prominent investors come out and express concern on the markets overall. Even to the point of stating that a prolonged bear market may have already begun. This is the equivalent of kicking the market when it’s already down. Humorously, one of these investors who stated cash was a “good place to be” changed his mind only four days later and stated that he was buying stocks after the decline. In his view, opportunity apparently arrived pretty fast! Some well known investors can move markets simply by making statements.
Bottom line: Volatility witnessed during corrections is driven by investors adjusting to changing expectations. Add to that a fair amount of emotional reactions. That said, we are very likely at an inflection point on future expectations.

The Weeds

“We’re going to do our jobs the way we’ve always done them… nothing will cause us to deviate from that.” – Jerome Powell, Chairman of Federal Reserve, December 19th, 2018.

There has been material criticisms focused on the Federal Reserve lately. Or in some circles, perpetually! The Fed’s mandate is to attempt to control inflation as well as attempt to maintain full employment. Emphasis on attempt, this is a tough task to say the least. There are a multitude of forces out of their control and at times adjusting the sails isn’t enough. That said, the Fed has sent a clear signal that they will focus on their mandates rather than on popular or political influences.

A Balancing Act

During corrections, we generally hear two narratives: “This is a great opportunity to buy some assets on sale” or “should we be concerned that the markets may continue to fall.” The short answer here is this must be assessed on an ongoing basis and there must be a process for this task. For those who would like to discuss the process for managing this balance, please feel free to contact me.

2018 will not go down as a strong year for the markets. In fact, as of last week nearly every asset class, including fixed income and commodities, were down for the year (treasuries were slightly in the black). This is an incredibly rare event. Both aggressive investors as well as conservative investors have struggled throughout the year. Slowing growth and rising interest rates are not a good combination for most asset classes. That said, 2018 will also likely not have a material effect on investor’s long term goals.

Is this the start of a prolonged bear market or simply another correction? At present, I still believe it is the latter but again this is an ongoing assessment. The headwind issues around the globe, late cycle indications in the U.S., and tightening policy have put us at what is very likely an inflection point. Time will tell.

Bottom Line: The balancing act between growing assets and protecting assets is always a bit cloudy at inflection points. This is why a rules-based process is critical to preserving capital. 

Leave a Reply

Your email address will not be published. Required fields are marked *