Often there is a media message that comes off as, ‘hey investor, here are the headlines, now what are you going to do about it’. We know what “their” headlines say: Impeachment, Trade War, Angst. From our perspective, there is not a cogent or constructive strategy that derives from tactical reaction or angst. If we could write our own headline, our lead would go something like this:
- The late cycle expansion continues: stay invested;
- The stress points are in the more economically sensitive sectors and the most expensive stocks: adjust your emphasis; and
- Defense is now just as important as offense: valuation and cyclical risk management really matter.
Admittedly, we would be very boring headline writers. What we see is that U.S. equity markets have been healthy year-to-date and modest-to-down over the past twelve months. (Trailing 12 months as of 9/30/2019: S&P 500 Index +2.2%; Russell 2000 Index –10.2%). However, the observation of healthy or modest does not seem to be part of the narrative.
It is striking to us that what passes for the market-centric news cycle is almost always written from the perspective of a tactical, aggressive investor who is in reaction mode. We want to approach investing from a different perspective: strategic, risk sensitive, and proactive.
Here is our take on the most recent of the current events. While political forecasts are not our specialty, we expect the impeachment process to resemble the impeachment experience during the second Clinton term: nasty, brutish and drawn out. But not, unto itself, the destructive event for the market. If you look to domestic politics for investment inspiration, you are not likely to draw much inspiration.
Our take on the “Trade War” is that the frictions between the U.S. and China, both economic and political, are likely to be a dominant theme for decades to come, with trade being the front burner question of this moment. Longer term, investors will do better to focus on the high-quality businesses that can thrive amidst global competition than to attempt to tactically trade the tape on short-term changes in policy negotiations.
So, what does a strategic, risk sensitive, proactive investor do now?
- The economic expansion continues. From our perspective, this is not yet the time to shift into a more defensive posture. Those who market timed out in last year’s volatile fourth quarter have had a significant opportunity cost. Ongoing expansion is likely to align with ongoing opportunity.
- This is a time to have a conversation about asset allocation and revisit thinking about exposure to risks.
- We have been tilting our sector emphasis away from the more economically sensitive sectors (Industrial, Materials, Energy, Financial), and toward the less economically sensitive sectors (Utilities, Healthcare, Consumer Staples) for four quarters.
- Have a valuation discipline. Expensive momentum stocks had a long run, but over the last year they have underperformed the broader market. Yes, you should avoid the premium priced, glamour stocks. We counsel a disciplined approach focused on the value of the business, not the price pattern of the stock.
- Continue to monitor the economic data and be alert to the risks that accompany recessions. Be thoughtful and prepared to manage for cyclical risk.
We have all been beneficiaries of a long, great run from both the U.S. economy and our marketplace. There has been plenty of noise for the whole duration of this expansion. Staying focused on the strategic signal has made a pronounced and positive difference. We are committed to maintaining that focus.