With U.S. equities trading down over 2% last week and down over 2% today, we want to reach out with our take on the collateral damage from the U.S./China trade talks. Prior to last week, the market had been assuming good news from a trade deal, so it is not unrealistic to think of this downward swing as a backing away from that optimism.
Before last week, year-to-date U.S. equities were performing in “priced for perfection” mode. When the S&P 500 Index was up 18% in the first four months, it was not projected that it was headed for a 54% year in 2019. Likewise, when Technology sector stocks were up 27% during the same time, neither was an 81% year for the sector being projected. When the market is priced for perfection and then imperfection inevitably shows itself, the repricing is a valuation correction.
Despite the current tactical sell-off, we affirm our strategy of being invested in high quality companies at reasonable prices as part of each client’s equity allocation. A tactical sell-off in and of itself does not cause us to shift to a more defensive or recessionary posture.
We remain vigilant in assessing cyclical risk, including data that would demonstrate a shift out of this economic cycle’s expansionary phase to an increased risk of contraction, which would cause us to move to a more defensive position with our portfolios. That data has not changed.
The companies with the most exposure to risk in this adjustment fall into two categories. The first are those with the greatest trade exposure with China, and the second are the most expensive stocks. Our portfolios do not have significant exposure to these categories. Our bottom up process has helped us to manage for these risks.
Savvy equity investors are accustomed to the idea that the road winds on the way up. Not that winding is enjoyable, but it is the nature of the way up. We look forward to our ongoing conversations with you in managing to your goals.