Research Director Monthly Commentary-July 2019

Q3 Investment Strategy Meeting Summary

 

We held our third quarter investment strategy meeting on June 27, 2019. The key outcomes from this meeting included: 1) a return to a normal equity investment allocation; 2) further simplification of our fixed income holdings. A primary focus of our discussion was the China trade situation and the Trump administration’s imposition of tariffs on Chinese imports. As of now, the concerns we had about an escalation in tariffs imposed by the Trump administration have been ameliorated somewhat but not entirely. On June 29, Trump met with Chinese President Xi Jinping. The outcome of the meeting was essentially a “truce” for the time being, no additional tariffs at this time, with the intent of continuing trade discussions for some undefined duration. All of this has defused the probability of an increase in tariffs in the near term and as a result, negates somewhat our earlier concerns about the tariffs. Therefore, we lifted our equity weightings back to a more normal allocation.  

The outcome of the Chinese trade negotiations is still highly fluid and essentially impossible to predict. Our sense now is this could be a very long “battle” and the uncertainty surrounding it remains an open-ended issue for the financial markets and global economy. Recent evidence indicates the trade dispute is beginning to have an impact on global growth. This nascent global growth slowdown is having a more direct impact on emerging market economies; however, Europe is also experiencing a serious decline in its growth partly due to its higher EM exposure. All of this is weighing on investor sentiment with the U.S. now considered to be the world’s strongest and most stable economy.

With respect to the current market outlook, we continue to believe the stock market can continue in a slow “melt up” process (albeit with normal volatility)  for several reasons: 1) decent U.S. economic growth; 2) expectations for improving earnings  growth later in the year; 3) U.S. is still considered by investors the most favored region in which to invest; 4) a Federal Reserve policy that remains highly accommodative toward supporting economic growth. That said, the slowing global economy is of concern and we are monitoring this. The global slowdown appears to be affecting the industrial and transport sectors more than services; but with U.S. employment strong, we believe the consumer sector can support the economy through yet another “mini-cycle”, or mid-cycle growth “adjustment”. We expect the bond markets to remain fairly range-bound with the tendency now for further modest downward bias for interest rates.

 In terms of changes in your portfolios following our meeting, as was mentioned above, overall equity exposure was increased by about 10% to a slightly above normal weighting. This reflects above normal weightings in U.S. equities (including REITs) with international equity weightings at the lowest possible weighting. Within large cap equities, we continue to maintain specific sector exposure in health care technology and dividend growth stocks. Within developing equity, we eliminated our holding in the telecom sector and added a holding in the software and services sector as we believe software has inherently higher growth with greater stability than hardware and capital goods. Within fixed income, we eliminated our holding in floating rate debt as we believe the benefit of that will be offset by modestly declining interest rates. Finally, we set an investment “trigger” that is focused on Fed policy, namely the potential for an unexpected change in Fed policy stance away from its current  growth “accommodation” stance.

Robert Toomey, CFP/CFA

VP Research