Looking Ahead Q3 2018 Newsletter

Market Recap

Except for a “blip” at the beginning of the year, the stock market, especially the U.S. stock market, has continued to recover from the punishing declines of 2000 and 2008.  

The U.S. economy has shown some wonderfully progressive momentum in its recovery, in part from the recent tax cuts and increased federal spending.  The economy is growing while inflation and interest rates remain low.  The U.S. GDP growth expectation for 2018 is 4.1%.  

As we reap the benefits, the question on everyone’s mind is, “How long will it continue?”

Today, emerging technologies have had a strong influence on our current low level of inflation, making goods and services more affordable and accessible worldwide. As the growth of technology expands, it will continue to make a positive impact on our economy as demand for goods and services are being met at a lower cost. 

At the Sept 26th FOMC meeting, the Federal Reserve increased short-term interest rates by 0.25%.  This increase was consistent with the Fed’s policy and we might see another rate hike in December.  The Fed increases short-term rates, which increases borrowing costs, to slow an “over-heating” economy and lowers them to stimulate a lagging economy. When the Fed increases the short-term rates to where they meet long-term rates, a flat yield curve, which has been a strong predictor of coming economic and market downturns. 

In addition to recent short-term interest rate increases, the 30-year Treasury, has increased from 2.8% in January to 3.2% in September.  

If long- and short-term rates continue to increase simultaneously, it could postpone the next economic downturn. 

There is no question a correction, or a cyclical downturn, will happen at some point, the important question is when and how severe this one will be?  

We don’t believe that we are in a similar situation to where we were back in early 2000 and 2008. We don’t have something looming like the tech bubble of the 90s or the huge unsupported debt issues and real estate bubble of 2008. It doesn’t appear to us, that a recession is immanent.  

We understand that you, as an investor, want to avoid potential downturns while taking full advantage of opportunities associated with strong economic growth. As such, we will continue our due diligence in keeping a close eye on interest rates and other possible indicators to advise accordingly.

“The stock market is a device for transferring money from the impatient to the patient”
- Warren Buffett

Trade and Tariffs:  Facilitating trade is vital to our continued economic growth.  A major part of why our country has gone through a prolonged period of growth is because cooperative trading practices have allowed other countries to grow and buy U.S. goods and services.  

When it comes to trade, there needs to be a type of give-and-take for everything to work properly — providing benefits and opportunities on both sides. Without it, prolonged periods of economic growth are difficult to sustain. A rising tide brings up all ships.

Another interesting topic is the impact of a growing number of individuals stepping away from work and into retirement over the next several years.  Whether retirees have less money to spend or simply choose to spend less, the result is less demand for goods and services that fuel economic growth.  The silver lining, technology increases a company’s output and profit margin with fewer employees.  With the use of technology and automation we may be able to rely on a smaller workforce.  

Why We Avoid High Growth & Deep Value Investing

In the course of selecting an investment strategy two potential pitfalls are deep value and high growth investing.  We believe they both present an unacceptable risk. 

The first of these pitfalls is investing in High Growth. These are stocks that have been rising at a strong pace with a large expectation that they will continue to rise at a rapid pace.  These stocks are often associated with a new technology that will change how something is done or a sector of the economy that has been growing rapidly and the growth is expected to continue. As a result people jump in.

If expectations aren’t met, even a small disappointment may lead to a sharp decline in the price.  A risk we are unwilling to take for our investors. 

The term Deep Value describes a company whose stock price is depressed because of significant bad news.  The expectation is that the price has dropped beyond its worth and the company will either recover with a rebound in price or the company will be bought out at a higher price.

Deep Value stocks don’t always recover.  If the bad news turns out to be as bad as or worse than expected the company may suffer serious impairment and even default.

It’s important to remember that every stock has millions of eyes watching it, billions of dollars available to invest in it, and computer algorithms designed to jump on or off. We believe the market is efficient and there aren’t extraordinary opportunities that are going unnoticed.

When investing, we believe the market provides ample opportunities with research to find good companies that will participate in future growth.