2019 turned into a remarkably overachieving year for U.S. Equities! In hindsight, the skies were blue, although intra-year there were worrisome nimbuses, including a threatening trade cloud and the political cloud darkened. For our part, we feel our strategy of focusing on offense in the expansion and letting the data drive served us well. Our approach of investing in high-quality companies at reasonable prices continued to provide favorable results.

Among the many data points worth contemplating in 2019, a few jump out at us:

  • It was a year of flat earnings growth and a big lift in valuations. Earnings went up a little, about 1.4% for the S&P 500 Index, and stocks went up a lot, 31.5% for the S&P 500 Index. This could be interpreted in several different ways.
    1. The market is looking beyond calendar 2019, anticipating robust growth in years ahead;
    2. Investors are not discriminating based on valuations, valuation risks are getting stretched, late cycle euphoria is intoxicating, and there is little desire to complicate the obvious good returns;
    3. Prices and valuations get out of alignment now and then and this could be one of those moments.

Our take is all of the above. The sum of these parts means risk management needs to assume a larger role in the year ahead.

  • We are in an unprecedented 11th year of economic expansion. Previously, the longest U.S. expansions were one instance of 10 years and one instance of eight years. We are not forecasting the next recession, just reflecting on the probability of an endless expansion being low.


At the risk of oversimplification, the outline of our strategy is as follows.

  • In periods of economic expansion, focus on strategic business investing and resist being tactical. We concentrate on bottom up selection of high-quality companies trading at reasonable prices to capture our fair share of the return. Do not compromise on quality or increase risk by investing in high valuation premiums. We align sector, industry and company weightings in our portfolios with the high-quality opportunity found in companies with better returns on capital, higher margins and better profit growth.
  • Late in the cycle, stay invested, let thedata drive, and with the sun still shining continue to make hay. Focus on bottom up scrutiny of valuation risk and be willing to defend gains in positions where success has led to premium valuations. Adjust sector weights away from more economically sensitive sectors and incrementally toward more defensive sectors.
  • During periods of economic contraction, lead with defense and risk management. Without any promise of precision regarding timing, when the dataindicates, reduce equity exposure, further reduce exposure to more economically sensitive sectors, and create dry powder/cash in readiness for the next bullet point of the cycle…
  • Late in the recession/during early expansion, having dry powder to deploy in the cyclical episode when fear and despair create bargains is the most exciting investment idea we know. Take full advantage of these
    once-in-a-cycle opportunities.


For the year ahead, our baseline scenario is: no recession, mid or better single digit earnings growth, valuation plateaus, and U.S. equities return in the range of 6%. We are alert to two potential disruptions. The first would be a valuation correction among the more expensive stocks and any collateral damage accompanying such a correction. The second is cyclical risk. The catalyst is about success in excess rather than outright failure. The market bloats and overprices its way into correction, and it is easy to find examples of overpriced stocks leading this market.

We are not negative, but rather, alert and cautious. Most importantly, we have a risk management strategy to help us focus on defense in all our strategies – equities and fixed income.