Q3 2019 Investment Commentary
As we wind down the second quarter of 2019, all eyes have truly turned to the Federal Reserve and their July meeting. After a period of interest rate hikes, followed by a large market correction in late 2018, the Fed has turned surprisingly dovish – so much so that fixed income markets have “priced in” at least two rate cuts for the year. Only time will if the outcome continues to support our domestic markets in their ongoing attempts to post new highs, or remove some previous support. We continue to believe we are well positioned in the fixed income market, and have recently shifted slightly from a defensive equity to a pure bond play in many portfolios.
In US markets, equities continue to rise thanks to the low interest rate environment, share buybacks, and positive consumer sentiment. Political talk of tariffs is not without its effect, though the majority of those increases have not yet been passed on to consumers. International markets continue to remain sluggish relative to their domestic counterparts. Developed countries suffer from low population growth and difficulty in kick-starting real productivity gains, while emerging countries - which are generally export heavy – continue to have valuations weighed down by global trade policy uncertainty. In the long run, we continue to believe international, and particularly emerging markets, are attractive places to invest.
Finally, there is the question that has proved all-consuming to the financial press: when is a recession coming? To us, it can feel like the conundrum of the man asking the fortune teller where and when he would die – so he would know where not to be! We all know that people, like bull markets, are not immortal, and predicting the time and location of demise would only certainly move the time and location elsewhere. The Fed’s 180 seems to indicate that economists are seeing slowing of activity, and we also have the predictions from the fixed income market in the form of a partially inverted yield curve that rates may yet go lower still, but both of those signs are unreliable and often vague as to any timing. Importantly, we don't see imminent signs pointing to one of the three leading causes of recessions: commodity spikes, aggressive interest rate policy (hikes), or extreme equity valuations.
So what do we do? Our team aims to build portfolios that we believe are robust against a wide range of economic scenarios. Rather than time market swings, or “go to cash”, we believe that both up markets and down markets provide opportunities for companies to continue to find profitable markets, grow opportunities, and increase their value to their shareholders. We are always available to talk about the specifics of your portfolio, and any question you may have.
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