Friday, April 5, 2019

Research Director Monthly Comment For March/April 2019


2Q Investment Strategy Meeting Summary

 
We held our Q2-19 investment strategy meeting on April 2. The meeting was of particular significance for a couple of reasons: 1) update to our investment strategy, 2) important changes in how we utilize and invest our investment models (more about that later).

In terms of the investment landscape for U.S. stocks, it has improved in the past few months. Why? Largely because investors are feeling more positive about Federal Reserve policy and the prospects for some sort of trade agreement with China. As you recall, the market experienced a severe pullback in the fourth quarter of 2018 driven by concerns that Federal Reserve policy would remain too restrictive and that trade negotiations with China were falling apart. The stock market actually experienced a “bear market” (a 20% decline measured by intraday high and low) in Q4, officially marking the fourth “bear” market pullback in this cycle (which began in 2009). While your portfolio may have experienced a (temporary) decline in this market pullback, diversification of your investments across several asset classes helped to reduce the drawdown in your accounts.

So far this year, the stock market has risen about 15% and appears to be poised to reach new highs in the near term driven by improved sentiment around Fed policy, the China trade deal, and higher second half corporate profits. Our concerns in the last quarter over an inverted yield curve appeared premature; not only has the ratio we were watching (10-yr/2-yr Treasury) not yet inverted but also the yield curve (which measures interest rates along the entire maturity spectrum) appears to be steepening of late. While we believe interest rates have probably bottomed near term, we do not believe an overheating economy or Federal Reserve policy will cause rates to rise dramatically. This is supporting a positive environment for stocks and helps to support our continuing positive outlook for stocks. Short of a dramatic increase in interest rates, which we do not expect, we believe returns on bonds will remain below historic averages for the foreseeable future.

As a result of our deliberations, our overall allocation to equities increased by about 4.5% due largely to higher allocations to small cap stocks and REITs. Overall allocation to bonds increased very slightly due largely to reduced exposure to intermediate maturity bonds and increased exposure to shorter maturity bonds to capture the income potential of rising short term yields. Within equities, we continue to maintain sector investments in health care technology through IHI (iShares Medical Devices ETF), telecommunications, and medical-related real estate through our holdings of Medical Properties Trust (MPW). We put considerable effort and time in this quarter’s meeting into improving our investment model by simplification and streamlining of holdings and sector investments. We expect this effort should improve the efficacy of our investment process with the objective being improved performance in your accounts and in achieving your investment goals.

Robert E. Toomey, CFP/CFA
Vice President, Research

 

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