Markets Fall as Investor’s Hedge the Risks On the Horizon for the Economy.
The equity markets in America have turned downward as result of some storm clouds that have appeared on the horizon that threaten to stall or slow the growth of our economy. Over the last few weeks the S&P 500 has fallen 10% from its September 30 peak and is now up just 1% for the year. All of MACM’s growth strategies have fallen from their September 30th peaks. MACM’s dynamic growth portfolio has declined 13% but is still up 8% year to date. AAI has given back 10% and is now up 5% year to date. Diversified equity has given up 12% but is still up 11% year to date. While we are unhappy that we have given back almost everything gained in the third quarter we believe that higher prices remain on the horizon for equities and the cycle is not going to end here!
First and foremost the sky is not falling and there is no eminent financial crisis on the horizon. While the equity markets have had substantial moves over the last several years the foundation for this growth is solid and the risk of a major meltdown in equity prices are minimal at best.
The equity markets are now simply discounting the risks that lie on the horizon. These risks are all about the economy slowing or possibly stalling here as result of several obstacles that have emerged.
The obstacles are:
1.) The impact on broad consumption from a housing marketplace that is peaking due to rising interest rates and softer demand from foreign investors.
2.) The impact from a trade war that is going on with China.
3.) The risk of Democrats gaining control of Congress and subsequently undermining Trumps plans for creating and reinventing new growth engines for America.
My job is to create alpha in both up and down markets and to protect your assets and preserve returns that have been made in the past. Balancing the goal of protecting the assets with creating alpha can be challenging. In 2014 and 2015 we had negative alpha as result of volatility in the markets. I opted not to stay fully invested throughout those sharp corrections and moved to the sidelines as the storm passed. The storm turned out to be only a minor problem for the economy and the markets were back making new highs by the end of the year. I quickly got back into the markets as the storm passed but the whipsaw effect turned a year with alpha into a year with no alpha. I’m trying to avoid getting whipsawed again as happened in 2014 but at the same time recognizing the possibility that this selloff could continue.
The markets will not likely get on a path of further growth with new highs until obstacle number three has been overcome. In the near term strong earnings reports that are underway currently should counter further selling in the market and help the market find a foundation here at these levels. Obstacles number one and two are not that problematic for the economy. Please understand that Housing has not been the big driver of economic growth that it was in the last cycle. Further America is not a major exporter of goods and services to the rest of the globe and the tariffs we have in place are mostly impacting agriculture, and this industry is not one the drivers of this economic cycle. Steel and Aluminum tariffs hurt the DJIA’s Caterpillar a bit but our Boeing had a remarkable quarter. Our FAANG stocks are insulated from tariffs and housing and will rebound quickly when the fear of a stall is overcome.
I am cautiously optimistic.