Research Director's Monthly Commentary: Review of Q3 Investment Strategy Meeting

We held our third quarter investment strategy meeting on June 24, 2016. It was a particularly interesting day in that it was the day following the “Brexit” vote. The fact that UK voted to leave the EU came as a surprise to investors and financial markets reacted accordingly. The Brexit and its implications made up a large portion of our discussion at the meeting. We consider the 5% U.S. market pullback following the vote by no means a “panic” but more a normal reaction to a new uncertainty. At this point, it could be many months before anything actually happens from this vote and how this all plays out remains to be seen. This maintains the element of uncertainty which can be destabilizing to the financial markets.

 

Prior to June 23 vote, our feeling had been that the economy and corporate earnings were poised for modest acceleration in the second half of 2016 and 2017. Following the Brexit vote our view on the U.S. economy has not changed materially, although the rate of growth we had previously expected of about 2.5% could be impacted slightly, perhaps 0.2-0.4%; we don’t see it resulting in a recession. We believe Brexit will have a more palpable impact on Europe as it sorts out trade and monetary treaties. This could impact the flow of trade and currency in that region and it is not out of the question that Europe could experience a mild or moderate recession as it goes through this period of adjustment. This could potentially have further negative effect on the financial markets.

 

With respect to interest rates, we believe rates will most likely decline over the near term as investors seek a “safe haven” in quality government securities, such as U.S. Treasury bonds. We also believe any rate hike by the Federal Reserve will now most likely be postponed into 2017. U.S. stocks should most likely continue to be viewed as a “safe haven” and this could eventually prove positive for U.S. stocks as well as bonds.

 

Following our meeting, we have taken proactive measures to increase portfolio stability in what we believe could be a period of elevated market volatility. We slightly reduced overall investment exposure in order to increase cash. Within large cap equities, we added a position in U.S. consumer staples (XLP) as we believe this sector offers stable earnings and rising dividends with below average volatility. We also added a position in utilities as this group has also exhibited lower volatility while providing a stable income stream. Within natural resources, we moved to represent this sector entirely with gold through purchase of the IAU gold ETF. Gold has historically acted as a good hedge during periods of heightened financial market volatility. Within fixed income, there were no significant changes and we continue to hold neutral weightings across all three maturity sectors. We also set in place a trigger that would require us to take defensive action if the yield on the 10-Year U.S. Treasury bond falls below 1.0%.  You can hear more about these changes by viewing our third quarter-2016 investment meeting video on our website at www.srchill.com.