By Thierry J. D. Brunel
Director, Matter Family Office
Time flies when you’re having fun! Somehow, we’ve passed the midpoint of the year—and what a year it’s been so far.
At the end of 2018, we recapped what had been a relatively tumultuous 12-month period, and reconfirmed our philosophy of maintaining a strategic focus and using volatility as an opportunity to rebalance. When you consider the headlines in the days following that post, however, it’s easy to be skeptical of our convictions:
Apple Makes Rare Cut to Sales Guidance (Wall Street Journal – January 2nd, 2019)
The Bad Stuff That Stock Markets Worried About is Starting to Happen (Bloomberg – January 3rd, 2019)
Trump Suggests Government Shutdown Could Last for ‘Months or Even Years’ (New York Times – January 4th, 2019)
The balance between boom and doom seemed biased towards the latter, with the focus on reasonable valuations and supportive fundamentals being the last refuge of market optimists. As we reflect on the last six months, and the strong upward momentum across all asset classes, we can only concede that crystal balls do not exist, and when it is all said and done, discipline is the only mandate on which we can rest our hats.
Despite giving back some returns over the last 10 days, US stocks are up 18.6% through yesterday while Non-US stocks are up 10.2%. Additionally Bonds have returned 7.8%. In a complete reversal from 2018, the rising tide has lifted all boats so far this year. Yet despite the strong returns we’ve experienced thus far across all asset classes, valuations across the board remain within reasonable ranges, with fixed income being the one potential exception.
For the data-lovers and chartists out there, this tactical outlook by our colleagues at ACG is worth an additional look.
So what are investors to do as we look towards the future? As expected, the Federal Reserve, cut interest rates at their most recent meeting. In theory, this should be supportive of stocks and risk assets. In fact, the Fed has cut interest rates 17 times when the S&P 500 Index was within 2% of reaching new highs, and each time, the S&P 500 ended up higher 12 months later. Conversely, in recent months, leading indicators—manufacturing data in particular—have been signaling caution. Most recently, the IMF reduced its outlook for global growth from the 3.3% they forecast back in April to 3.2% citing, among other things, trade risks (which have only intensified in the last week) and manufacturing slow-downs as some of their key risk factors. Further, they indicated that their outlook contained greater risks to the downside—in other words, the IMF believes it is more likely that things could get worse before they get better. Central Banks across the world seem to be echoing this perspective, as New Zealand, India and Thailand all reduced interest rates this week in a sign that they are preparing for a slower growth environment going forward.
Clear as mud, as they say! Our advice continues to be: take this opportunity to reconfirm long-term targets and objectives, and rebalance as appropriate. It might not seem like a lot, but, ironically, staying the course requires the biggest commitment, because during these periods of uncertainty we most naturally want to throw discipline to the wind and “do something.” At Matter, we appreciate that concern and enjoy working with our client families to determine whether circumstances warrant action—or whether they warrant restraint. The line between the two can sometimes feel blurry, but we’re here to help bring it back into focus so families can make the best decisions in the long-run.