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
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