Q4 Investment Committee Meeting Review
We held our Q4-2018
investment committee meeting on September 27. The key take-aways from the
meeting are: 1) we continue to have a
positive view towards equities; 2) we took some steps to modestly de-risk our
U.S. equity exposure; and 3) our stance towards fixed income holdings remains
unchanged.
The macro context for
equities continues to remain positive due to a strong U.S. economy and
continued strong corporate profit growth. The U.S. economy is showing
broad-based strength across virtually all sectors. Consumer and business confidence
remains strong and is driving healthy spending in those sectors. Employment is
strong. Manufacturing is healthy reflected in rising orders and production and strong
corporate cash flows are getting recycled into the economy by way of increased
hiring and capital spending. We believe this bodes well for continued economic
expansion. While the trade tariff issue continues to be a concern, the quantifiable
impact of tariffs on the economy are modest and very small in actual dollar
terms relative to total U.S. trade volume.
With respect the Federal
Reserve’s recent increase in the Fed funds rate, this was expected and does not
alter our assessment of Fed policy which remains essentially unchanged. At this
point, Fed policy continues to remain gradualist and accommodative to the
financial markets. At some point this may change, but we believe it is a ways
off, especially if inflation remains low to moderate. We expect there will be
some increase in inflation over the next year but we believe it will remain
modest, perhaps 2.2-2.5%, and certainly not 1970s-style inflation. Low
inflation should allow the Fed to remain gradualist in its policy and thereby should
not be overly disruptive to the financial markets, at least near term.
On a relative basis, we still
believe U.S. equities remain the most attractive of the major developed markets
and we therefore continue to overweight our U.S. equity exposure and
underweight international. While the U.S. economy is clearly in the most stable
condition of major world economies, of late emerging market economies have
suffered due to uncertainties surrounding the trade tariff issue. The Eurozone economies continue to plod along
at modest 2% growth and we do not see much upside to Eurozone growth.
We have become somewhat more
concerned of late about stock valuation. Valuation is “high” by a number of
measures. While a high valuation does not imply an imminent decline or rollover
in the market, we believe it is prudent, given our concern, to address
valuation risk in your portfolios. A couple of the steps we are taking this
quarter to mitigate valuation risk include: 1) increasing weightings toward
value stocks; 2) adding a position in the U.S. telecom sector ETF (IYZ) which
we believe offers lower valuation and reasonable risk/reward. Taken together we
believe these actions place more of your equity investments into sectors that
offer lower valuations and lower downside risk in the event of a market
decline. Within commodities, we added an investment in the metals and mining
sector (XME) as an inflation hedge. Overall, our equity exposure was reduced
very slightly. There were no changes in our bond holdings nor were there any
significant changes in weightings within the three fixed income sectors. We
expect interest rates will continue to rise gradually and we therefore continue
to maintain the lowest possible exposure to long bonds while keeping overall bond
duration at the low end.
Robert Toomey, CFA, CFP
Vice President, Research 9/28/18
