Continued Optimism, with a Dose of Cynicism to Keep it Real...
Updated: Mar 19, 2019
The S&P 500 continues to power along with a nearly 3 decade first by being up over 10% through January - February.
Optimism? Sixty-four percent of the time the market ends the year following the trend of January - February...
So where is the cynicism and why?
As comforting as it has been to see the Fed become more accommodative with their interest rate hikes and tempering of quantitative easing, the danger lies in staying in this easy money environment that (may be) continuing to push risk assets (equities) to bubble like levels. By tempering their progression in raising interest rates, the Fed may be putting themselves into a recessionary trap.
In previous recessions, the Fed has needed to lower interest rates as much as 5% to kick start the economy...and with rates still in the 2.5% range, they may not have adequate ammunition should the economy hit an extended soft patch or recession.
What else is there to be cynical about?
Well, US corporate earnings expectations are declining, housing continues to contract, and China, the second largest economy in the world, continues to remain below its historic growth rate.
What does all of this mean?
Make sure equities represent the long end of your asset allocation...future growth. Certainly, as demonstrated in December, volatility will return. But volatility is a normal part of being an equity investor. The losers in the equity markets are those who jumped out in 2008-2010 and never returned. If you cannot stomach the volatility, we have tools to give you exposure with some compromise on outsized returns, but on a risk adjusted basis for the right client/goal, these can be an excellent tool in tandem with diversification into additional asset classes.
Dave + Drew