After the 6 months we have just witnessed, an emoji seems appropriate! Hmmm.
Through 6 months of 2019, we failed to resolve the trade dispute with China, initiated another trade skirmish with Mexico, and saw the Federal Reserve hint at rate cuts (but take no rate action yet). In addition, Brexit remains a “mess,” and yet equity markets have surged higher. In fact, the first half of 2019 is among the best starts to a year in decades.
The first half serves as a vivid reminder that markets can move faster than anticipated, further than anticipated, and for reasons that may not immediately seem logical. Historically, long-term investors have benefitted from not second-guessing ownership of equities for the long-term.
Over the last 12 months, the S&P 500 returned a rather “normal” 10.42%. What may not have felt at all normal (20% selloff followed by a sharp reversal this year) was quite ordinary when viewed through a long-term lens.
But it’s equally difficult to ignore all that transpired in the past 6-12 months (nor do we suggest you should ignore it). There are legitimate economic, political, and social challenges ahead of us. We recommend investors digest them and; reflect on them, but don’t try to ignore them. Likewise, try to avoid making quick and emotional decisions based upon them.
As tumultuous as the past months may have seemed, in the context of history, this is rather normal. Consider all that took place in the 1980’s, on the heels of high inflation and an assassination attempt on President Reagan. The US boycotted the Olympics, we saw a hostage crisis in Iran, Russia invaded Afghanistan, the Berlin Wall came down, Long-Term Capital Management blew up, and the stock market crash of 1987. And despite those tragic and terrifying moments, the markets pushed higher.
It’s easy to second-guess a market that is up more than 450% since the 2009 bottom. It was easy to find fault in a market that was up 300% a few years back. As we reflect on this great start to 2019, don’t lose sight of the fact that the market may still press on. Maintain focus on your goals and don’t try to time what some classify as a “bottom of the 9th” market we face today. It could turn out to be a 12-inning game!
The Balance of 2019…
In the mid-year recap, we reference all that has yet to be resolved in the first half. And yet the markets have pushed higher! In many ways, the markets (both equity and bond) have priced in expected outcomes. The second half of the year largely hinges upon those expected outcomes. The market rarely responds favorably to economic and geopolitical surprises. The markets, historically, respond most favorably to certainty!
Below are 5 key questions the markets will anxiously await being answered in the second half:
- Is there a trade resolution with China (and does it have enough substance to have warranted the time it took)?
- Is there any progress in the UK with regard to Brexit?
- Does the Fed cut rates, and, if so, by how much?
- Can the domestic economy continue to pump out 2.5% plus GDP growth?
- Who emerges as the leading candidate for the Democrats heading into the 2020 election?
Alone, none of the above items, will single-handedly move the price of a stock or the broad markets. In concert, however, these issues will go a long way in determining how 2019 finishes.
The resilience of corporate earnings was one of the positive surprises of the first half of 2019. If such continues in the second half, the markets are likely to be able to shake one or two unfavorable outcomes to the 5 questions listed above. If earnings growth underwhelms, one could see the second half considerably contrast the first.
What is an investor to do differently in the second half? How should one respond to the successes of the first half? Candidly, the simplest answer is to remain focused on your personal goals and objectives. For some, this may mean trimming to capture gains and reallocating some dollars more conservatively. For others, it may only involve tactical shifts our team makes within our models.
Few investors entering 2019 set out to outperform the S&P 500. Instead, most were looking for an absolute percentage return. Many have reached their target by mid-year. One cannot afford to lose sight of that target!
Most often, the late stage of a market cycle is a grind, followed by one final exuberant run before reversing course. Hindsight is always 20/20 but rarely do investors wish they had shown less discipline in their portfolio.
Today, that discipline cannot be discussed without addressing how one manages risk. Recently, our team has made changes to our portfolios with risk mitigation in mind. Whether at the portfolio level or model level, we believe it’s prudent to identify and reduce exposure to those risks we feel are less likely to be compensated. From trimming small/mid cap to exchanging EM equity for EM debt, we aren’t idly sitting by as we enter the back half of 2019.
Time & Timing Both Matter
Two of the “great truths” of the investment industry are that one cannot time the markets and that time invested in the markets is one’s friend. Few argue these points.
What is somewhat less often articulated is that timing does matter. Every investment milestone for investors has a timing component attached. For example, if retirement at age 65 is a target, there’s a year attached to that goal. One simply cannot know where the S&P 500 will be at that time, where yields may be, and who will occupy the White House. Future tax rates are an “unknown,” and the role inflation may play can be anticipated; but remains only an educated guess.
Yet for those landmark goals, investors look for as much certainty as can be found. Most seek to ensure that they won’t outlive their assets, yet most are left with the reality that they cannot fully eliminate risk.
It could be said that nearly every investor “times” the market inasmuch as they aspire to an accumulated dollar value at retirement. But what if that retirement year had been 2007? Or 1999? The story could feel much different than for the investor retiring in 2019.
So how can one reduce dependence on timing? Put simply, one solution is to embrace that other truth of time in the markets. Rather than making huge allocation changes at retirement, investors should always be focused forward and slowly adjust exposures along the way.
For most investors, retirement is not the end. Today people live 25-30 years in retirement. In fact, by 2035 the US is projected to have more people over the age of 65 than under 18 for the first time ever! Retirement isn’t the end, but rather a big step along the way. For most, equities will remain a valuable component well beyond the year of retirement.
As you approach retirement (or perhaps look at it in the rearview mirror), remember that your retirement success still has a performance component attached. For each investor it will be different, but for nearly all, identifying your goal and managing toward it will help you be less vulnerable to timing and more likely the benefactor of time!
To learn more about specific ways our team can help, please give a member of our team a call.
Alternatives : Why?
In the 1980’s an asset class known as “alternatives” began to emerge in the securities industry. As the name suggests, this category encompassed strategies and managers who were otherwise difficult to classify. Strategies included range from hedge funds and private equity to futures and structured products. Some even consider annuities as alternatives in a way.
Today, many would agree with a characterization of the “alternative” landscape as one fraught with confusion, high fees, lack of transparency, complexity and often disappointing performance. The asset class often is positioned as a hedge or an absolute return strategy. Often it has failed to deliver on investors’ expectations.
That doesn’t mean the asset class is without merit. Yale’s endowment is widely known for outperforming its peers and the broad markets because of its use of alternative components.
Our team views alternatives a bit differently than many, both in its purpose within a portfolio and the expectation of what value it can provide. For example, with today’s prevalent low interest rates, one can argue low volatility alternatives that seek 4-6% per annum have a greater probability of achieving that goal than a conservatively constructed bond strategy. There’s no assurance either strategy will achieve its goal, but we would suggest that there’s a lower probability that a high-quality bond portfolio will hit 6% when compared with a well-disciplined and low volatility alternative strategy.
In the equity space, on the heels of a 10-year bull market run, alternatives can serve as a way of maintaining exposure to equities with “guardrails.” For example, a common construct in the world of structured solutions is a buffered note (also available in the daily-liquid ETF space). Such notes offer investors the opportunity to participate, to a cap, in the underlying index while having a buffer against loss on the downside.
For each client, the needs are different. We believe alternatives can serve the dual mandate of helping to manage risk and pursue returns in this challenging time. Rather than looking to alternatives for big returns, we look for them to better enable us to target your goal returns while dampening volatility.
Your Math… Helping It Add Up
For many investors, the illustration below may be eye-opening. While very simplistic, it often helps investors see why we pursue asset classes beyond the scope of just equities and bonds alone. For many investors, the math below shows them coming up short.
Head Investment Partners
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Reliability of Sources The articles and opinions expressed in this document were gathered from a variety of sources, but were reviewed by Head Investment Partners,LLC prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. In all cases, please contact your investment professional before making any investment choices.
Return on Products The return assumptions are not reflective of any specific product, and do not include all fees or expenses that may be incurred by investing in specific products. The actual returns of a specific product may be more or less than the returns used. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to directly invest in an index. Financial forecasts, rates of return, risk, inflation, and other assumptions may be used as the basis for illustrations. They should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. The return and principal value of the investments will fluctuate so that, when redeemed, they may be worth more or less than their original cost. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.
Opinions Opinions expressed are subject to change without notice and are not intended as investment advice or a solicitation for the purchase or sale of any security. Please consult your financial professional before making any investment decision.