Monthly NewslettersYear In Review Summer 2018 Was No Time For A Siesta

Another quarter of landmarks is in the books.  It seems that a year’s worth of headlines was crammed into the space of only 91 days.  Consider the partial list of Q3 headlines below:

  • Apple is first $1 Trillion public company
  • Elon Musk tweets about going private?!
  • US Bull Market officially longest ever
  • Trade war intensifies
  • Cannabis Stocks go on a monumental tear
  • The Fed continues toward “normalization”

Despite a “noisy” environment, the US markets pushed higher, with each of the major US equity indices reaching new highs.  Regardless of the threatening headwinds, the US market has continued to press higher in a rather orderly and resilient manner.

Other parts of the world, however, have shown less resilience.  Concerns in Italy, coupled with the looming challenges of Brexit have begun to cast doubts on the timing and scale of Europe’s recovery.  The strength of the US dollar, along with the continuing trade rhetoric, have caused a rotation out of Emerging markets.


Investors have increasingly been asked to overweight US Growth or show patience in the face of new high after new high for the S&P 500.  The MSCI EAFE and MSCI EM (non-US developed and Emerging markets) are both negative year to date.  The Barclay’s Aggregate Bond Index is negative YTD.  Furthermore, the Russell 1000 Growth has outpaced its value counterpart by more than 13%.

The upward move of “the markets” has been both impressive and quite narrow.  How long can such a phenomenon last?  How long will diversification be seemingly little rewarded? Perhaps the perspective shared below may help answer that question.


“The market can remain irrational longer than you can remain solvent.”  Attributed to John Maynard Keynes, this quote was featured in a 1999 New York Times article that proved a sobering precursor to the Technology Bubble that soon followed. Missing out on the last leg of the late 1990’s rally didn’t make your math incorrect.

Irrational Exuberance, as Alan Greenspan termed it, was a dominant theme of the late 1990’s.  In hindsight, momentum drove prices well beyond the “logical” or “defendable.” Nevertheless, fear of missing out brought more and more dollars.

The last phase of the 1990’s run was a dramatic outperformance by Growth stocks.  Put most simply, Growth stocks are those whose price is most closely tied to what a company MAY do in the future.  Value stocks, on the other hand, tend to trade more upon what the company HAS DONE.

Diversified investors are typically allocated across both growth and value…and at any point in time one may significantly outpace the other.  Reference how Large Cap Growth out-paced Large Cap Value by more than 20% in consecutive years (1998 & 1999). Mid & Small Cap Growth outpaced value peers in 1999 alone by 57% and 52%!

When such tides turned, however, value investors were rewarded for showing patience. Resilience and discipline proved more than ideologies. Value outpaced growth the next 3 years by double digits each year.  Look at the table to the right.

So why the history lesson?

For more than 9 years, simply being “long” equities has been a highly profitable trade.  For the last couple of years, the disparity between growth and value has widened.  While not to the extremes of the later 1990’s, the nearly 13% YTD delta is noteworthy.

The market’s leadership remains quite narrow (well over ½ of S&P returns YTD stem from the S&P 500’s three largest holdings…Apple, Amazon & Microsoft). Accordingly, we are growing increasingly concerned about the sustainability of current momentum.

Many investors have grown to feel “trapped” into holding a greater allocation to equities because the counter, owning bonds, presents historically low nominal yields. As the turn of the last millennium reminds us, risks often have significant and outsized consequences. Managing risk is never optional and may not always APPEAR to be rewarded with a single snapshot.  Risk Management is the hallmark of a disciplined and patient investor!



Entering the 4th quarter, investors taking the most risk have generally been the most rewarded.  As evidence, during a day in late September the market cap of Cannabis company Tilray surpassed that of nearly 300 members of the S&P 500…despite less than $10 Million in gross sales. Sound familiar? Perhaps you too remember participating in the Macy’s Thanksgiving Parade, only to be bankrupt a year later?

We have begun to see encouraging signs of a shift back in favor of more value-oriented, earnings-driven companies. Whether that proves to be a head-fake or shift in trend remains to be seen.

Consumer Sentiment is high. Unemployment is low. Inflation is at the Fed’s target. Balance sheets look solid and corporations are flush with cash.

On the flip side, earnings expectations are high. Corporate share repurchases have slowed. Trade uncertainty has slowed capital spending. Many stocks are priced with little room for error.

Q4 will not likely prove boring! 

The Federal Reserve is widely expected to raise the Fed Funds rate a 4th and final time in December.  With the average 30-year mortgage on the cusp of 5% for the first time in a decade, many eyes are watching to see the impact on consumers.

While we are not looking to introduce additional risk for most portfolios by chasing what’s hot, we are also not shifting away from our equity exposures. We remain confident in current model allocations and believe strongly that our Strategically Diversified portfolios are well positioned for whatever may lie ahead.

As JP Morgan recently reminded us, investors should both “make hay while the sun shines” and “fix the roof while the sun shines.” Managing risk is the common thread.

We remain cautiously constructive toward US equities and less enamored with non-US exposures at the current time.  We strongly believe that greater volatility lies ahead and, accordingly, believe allocations to our alternative offerings will serve as a strong source of differentiation and value-add in the coming quarters.

As we emphasize in nearly every communication, discipline and risk management are invaluable.  With those key elements firmly in place, we proceed confidently into the 4th Quarter of 2018 and beyond.


Investopedia defines an Alternative investment as one not of conventional type such as stocks, bonds, and cash.    Most investors seek out alternatives that derive returns in ways unlike traditional holdings.  Typically, such solutions have come with reduced liquidity, little transparency, and high and complex fee structures.

Not so with our team!

Each of the strategies our team manages in the Alternative space have daily liquidity.  Each has an all-in fee structure more akin to a mutual fund than a hedge fund.  As investors struggle to balance risk and reward, we firmly believe our alternative solutions can help solve an otherwise complex math equation.

Rather than banking on an appreciating market.  Rather than take undue risks in fixed income to try to ratchet up yield. Rather than shift allocations toward percentages that keep you awake at night, consider how our alternative suite can help.

The HIP3 suite of alternatives includes:

  • Focused Equity Overlay
  • Focused Equity Covered Call
  • Focused Put Writing
  • Dynamic Risk Solutions
  • Customized options strategies tailored to your personal goals and objectives

Please reach out to a member of our team to learn more about how such strategies as the above can complement current holdings.


Joe Terranova is chief market strategist for Virtus Investment Partners, a position he was elevated to in 2009, after having started with the company as chief alternatives strategist. Mr. Terranova has been an ensemble member of the CNBC Fast Money franchise since 2008.

Mr. Terranova is perhaps best known for his risk management skills, honed while overseeing MBF’s proprietary trading operations during some of the most calamitous times for the U.S. markets, including the first Gulf War, the 1998 Asian Crisis, 9/11, and the collapse of Amaranth Advisors. In 2003, he was one of the first Wall Street professionals to make an early call for higher energy, natural resources, and commodity prices. In June 2008, he cautioned investors to move to the sidelines in commodities and, in March 2009, he encouraged investors to ignore the global “embracement of pessimism” and overweight equities. Before joining MBF, Mr. Terranova held positions at both Swiss Banking Corp. and JP Morgan Securities.  He also frequently contributes exclusively to CNBC’s other business programs. He is the author of “Buy High, Sell Higher” (Business Plus, 2012), a book about the “new rules” of investing based on his years as a professional trader.

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