S. R. Schill & Associates Research Commentary……

Follow Up On Our Recent Decision to Implement Our Trigger

 As you are most likely aware, on May 10 we implemented an investment strategy trigger that was set at our investment committee meeting in March. The trigger we set was to reduce our allocation to equities in the event President Trump invoked additional (25%) tariffs on imported products from China. During the week of May 6, the China trade negotiations broke down and Trump implemented the tariff increases, which caused us to implement our trigger. The investment triggers are normally set in anticipation of an event which we believe to have a low probability of occurring, but if it did occur, could have a material impact on the market and, hence, client portfolios. We set these triggers as a way to anticipate potentially negative (and sometimes positive) events and decide on a mitigation or risk-management strategy in a calm-headed way.

 So where are we now two weeks post-implementation of the trigger? Since May 10, the stock market as measured by the S&P500 is down about 2%. However, volatility has been fairly high. Technology stocks and high P/E growth stocks, particularly those with high exposure to China, have been exceptionally volatile. Additionally, there is some increasing evidence that the global economy may be slowing which raises some concern about global corporate profit growth. April U.S. durable goods orders were much weaker than expected driven primarily by lower exports implying weaker growth overseas. There has also been some increased speculation that the Federal Reserve may be growing concerned about the pace of economic growth which could lead to a Fed funds rate reduction later this year. Why might that be considered negative? In the context of a slowing economy, a fed funds rate reduction could be viewed as a negative signal for growth. We would also note that counter tariffs on goods coming from China have not yet hit U.S. companies and could pose some added risk to U.S. corporate profits.

We note that prior to the implementation of increased tariffs, the stock market made a dramatic recovery from the December 2018 lows. From the December 23 intraday low to the April 29 recovery high, the stock market gained 25%. That is about 75% on an annualized basis and is clearly not sustainable. At this point, we would not be at all surprised to see a further pullback in the stock market which would be perfectly normal as part of a normal technical “recovery” from a severe correction like we had in December (a technical recovery from a severe correction can take 3-6 months and can be volatile). Some of the factors that could cause this pullback are technical trading factors while fundamental factors could be lingering uncertainty about the trade dispute with China, concerns over a slowing global economy, or a host of geopolitical factors. The important thing to remember is your portfolios are diversified and as such, are specifically designed to be prepared for and to withstand bouts of market volatility which we know will occur periodically.

 

Robert Toomey, CFA/CFP

Vice President, Research

Implementing Our Current Trigger To Reduce Equity Exposure

As you are aware, at our quarterly investment strategy meetings not only do we discuss market and economic factors that might impact investment strategy, we also set triggers that require us to take some action (either buying or selling) based upon some future possible event or occurrence. This is done to allow us to set action or policy in a non-emotional or knee-jerk fashion should the event actually occur and is also a way to manage investment risk. Normally, when we set these triggers, we do not expect the event to occur or believe there is low probability of it occurring; but if it does occur, it would have a material implication for investment strategy.

At our last quarterly investment meeting on March 27, one of the triggers we set was to reduce equity exposure to the low end of the investment range in our models in the event President Trump imposed the full 25% tariffs on imports from China. As of this morning at 12:01 a.m., those 25% tariffs went into effect. We have therefore, as of this morning, reduced equity allocations in all of our models to 90% of a normal allocation and have implemented this change in your accounts as of this morning. Of note, we have only implemented (“pulled”) an action trigger perhaps once or twice before in the history of the firm, so these events are very rare.  

We had been of the belief that there would be some sort of trade agreement and still believe there very well may be one in the not too distant future. As you know, a lot of this is “posturing” on the part of both Trump and the Chinese and we believe Trump’s implementing the increased tariffs is a negotiation ploy. Both sides are engaging in negotiating ploys and neither side wants to appear weak. Our concern with the higher tariffs is that it would have a dampening effect on economic growth and therefore, it would have a negative impact on U.S. corporate profits which is the key fundamental driver of stock prices. We will be following the trade situation closely.

S.R. Schill & Associates

May 10, 2019