A Message From Our President:
March 2019 Market Update
On one of my first trips to Colorado I was determined to climb a mountain. At the time I lived on the East Coast and had no experience with hiking in the high mountains. But I was young and convinced I could do it. I visited a local outdoor store and bought some basic equipment to keep me safe and extra water bottles to ensure I would have enough. My wife, who was pregnant at the time, didn’t think my hike was such a good idea. After assuring her I had everything I needed I started early and was doing well until I reached an enormous boulder field near the summit. I had to move slowly and carefully to avoid tumbling thousands of feet down. As I methodically moved across the rocks I realized that I was running out of water. Despite packing extra water I was running out. I was running low and still had to hike all the way down. With a rueful glance at the summit I turned around. While I really wanted to reach the summit it would have been a foolish risk and am glad I descended. Just as hikers need to pack their bags for adverse conditions and know when to back down, I think investors need to make sure their portfolios are packed for volatile markets in 2019.
While the Federal Reserve has been increasing interest rates in 2018 we foresee a period of flat rates in 2019 with the possibility of lower rates at the end of the year. The possibility of lower rates at the end of 2019 was not viewed as a realistic option in the third quarter of 2018. Now investors are concerned about the possibility of softer growth and pricing in a 20% chance of lower rates by January 2020 according to CME Group.
After a difficult fourth quarter we believe the U.S. economy is likely to transition from growth to a shallow slowdown towards the second half of 2019. U.S. Industrial Production ended 2018 up 4.1% from the 2017 level. However, US Total Manufacturing Production (up 2.7%) and US Total Mining Production (up 12.6%) are projected to transition to slowing growth trends early this year. [Source: ITR Advisors, February 2019] While consumer spending has been strong in recent years we anticipate that retail sales will continue to rise but at a slower rate, which will put pressure on corporate earnings. We also foresee a slower rate of growth for employment through 2019. Nonetheless, by historical standards this should be a shallow slowdown because there are no signs of credit bubbles, excessive asset valuations, or high interest rates or inflation that often accompany more serious downturns.
For investors, we think it is best to ensure their portfolios are packed with tools to handle volatile markets. These include value stocks, bonds, and managed futures. Value stocks are less expensive than the broader market. They can help avoid the risk of investor’s disappointment with high-growth companies that may miss earnings estimates when the economy cools. Indeed, value stocks have outperformed growth stocks since the beginning of October 2018 until now. [Source: BarChart.com; iShares Russell 1000 Growth Index (IWF) & iShares Russell 1000 Value Index (IWD)] Investment grade bonds generally respond well to volatility in the stock market and economy and rise in price if central banks lower interest rates to help stimulate the economy. Managed futures are trend-following investments that invest in assets going up and down in price. They can help cushion portfolio returns in volatile markets by benefiting from price declines.
Climbing mountains requires the right supplies and careful preparation. As we look ahead to 2019 we’re preparing for more volatility with investments that can weather the storm. If we prepare ahead of time for adverse conditions we can endure and move forward to our long-term goals.