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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