strategy

  • Stocks, Bonds, Risk & Return

    Will The Trade War Further Diminish Economic Growth?

    Investors have witnessed a number of strange occurrences in recent months, if not years. Though stocks have staged a big rally this year (most of it in January), this has merely been an attempt – unsuccessful as of yet – to recover from 2018’s 20% decline that stocks experienced towards year’s end. Even more interesting and odd is the fact that stock prices are lower today than they were in January 2018 – over 16 months ago! What gives? Why are stocks stuck in this long trading range and when will markets allow us to get back to making significant long term returns?

    Source: Bloomberg

    Global stock markets are tied to economic growth and corporate profits. One need look no further than 2017 as a reminder – a period when economic growth exceeded 3%, corporate profits skyrocketed and stock indexes and your portfolio of stocks soared upwards of 20%. Those were the days!

    However, as we review the past few quarters, economic growth rates have decelerated from over 3% to something closer to 2% or less. The Atlanta Federal Reserve Bank GDPNow model’s most recent estimate is that the US economy is growing at just a 1.3% annual rate in the current quarter. And the Atlanta Fed’s model is not alone: the Economic Cycle Research Institute runs a historically reliable Weekly Leading Index that also shows the US economy is slowing to a stall.

    Lastly, the decline in long term US Treasury yields (lowest level in 2 years) and falling commodity prices are signs that the economy is not on solid ground. Investors would be wise to keep these facts in mind.

    The slowdown in global and US growth is largely attributable to the Federal Reserve’s rate hikes in 2018 which in turn led the punishing 20% decline in stocks. Add to that the month-long US government shutdown and the now real effects of tariffs and it is plain to see why the economy has drifted to a slower pace. In the meantime, it is quite clear that corporate profit growth is feeling the effects of this slowdown.

    Though some companies such as MasterCard, Unilever, and NextEra have been able to generate respectable growth in this slowing economy, many others have missed earnings growth expectations – most specifically in sectors that are sensitive to the economy such as the industrial and consumer discretionary sectors. If the economy continues to slow – or more importantly recede (as in recession) – earnings and stock prices could be in for a further downside slide. Therefore, the key to managing your way through a slower economy is to make sure your portfolio has companies that can generate profits regardless of the economy and also be flexible about your level of stock exposure.

    Just because the economy has slowed doesn’t mean that the market needs to spiral into a wicked bear market (more than the last 20% decline). If the economy can maintain this slower than normal growth rate, there are plenty of companies you can add to your portfolio to potentially make handsome profits this year, particularly in the healthcare, select technology, financial and consumer staples sectors.

    As you know, in an effort to put the odds in your favor for a good year of performance, we have been patiently waiting for stock prices to experience a normal correction after the big rebound in January. That correction appears to be underway as of this writing (~4% off high) – this should give you great opportunity to add more stock exposure in companies that can generate profits in this slower than normal part of the economic cycle. Of course, if the correction appears to be gaining steam on the downside (which would probably be due to negative news about the economy, profits or further tariffs) I may suggest you slow such purchases. Remember: when economies – particularly those threatened by tariffs – are weak, stocks can really take it on the chin.

    Throughout history stocks go up about 80% of the time – however, the 20% of the time stocks are not going up is usually tied to the economy – and this time appears to be no different. The stock market doesn’t deliver consistent year-to-year returns and never has. The important part for investors is to dodge the grizzly bear markets (declines of 35-60%).

    Successful long term investing takes patience and discipline and a keen eye for what the market has done recently (in this case nothing for almost 18 months); and as well an eye for where the economy and profits will take us as we go forward. Once this period of economic weakness stabilizes or even contracts, we could have many years of bull markets and profits to look forward to in the “80% of the time” mode. The stock and real estate markets have been and, as far I can see, will continue to be the best places to grow wealth over the long term.

    Protecting capital in bear markets allows you to reach your long-term goals, whether those goals are to retire, meet your organization’s spending policy guidelines or leave a greater legacy for the next generation. In that spirit, continue to monitor the global economy, the effects of continued tariffs and to manage the risk of your portfolio through your allocation to stocks, sector management and the use of carefully placed stop-loss orders.

    I hope this update finds you well and that you enjoyed the Memorial Day Weekend.


    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon

  • Market Rise Driven by Speculation…Not Positive Data

    My Strategy for a Good Year Regardless

    The recent advance in stock prices has been stellar and has caught most investors by surprise. The biggest mystery surrounding the recent rally is the lack of any signs that the economy or corporate profit picture is improving. In fact, during the last two months, economic data points both here and abroad continue to show signs of slower than expected growth, while corporate profit growth targets have been unable to meet previously lowered guidance.

    If economic growth and corporate profits drive stock prices (which is how it’s always been) how can one explain the market strength in recent months? Is the stock market indicating that the recent global slowdown will be over sooner than we think? Or is the recent rally based on overly enthusiastic investors simply participating in an all-too-common case of chasing stock prices in a bear market rally? Let’s take a look at both scenarios and provide you with an update on my strategy going forward, and why I am optimistic about your portfolio’s performance as the year progresses.

    As a reminder investing aggressively in the face of a significantly slowing economy and deteriorating corporate profit environment is risky business. It is during these types of circumstances that investors have historically been hurt most – think of past bear markets (2008 or 2001) that started in a similar fashion – hence our more careful approach in recent months.

    Was all of the “bad news” already in the price of stocks back at the December lows?
    We are just weeks away from corporations reporting their earnings for the first quarter of this year, which should be very telling. Included in this data will be the impact of the long US government shutdown and the negative affect it had on consumers and business spending during those three months. These upcoming profit reports will likely be worse than the previous quarter, and far worse than comparisons to a year earlier. Maybe the recent market strength is a sign that both upcoming and future reports will not be as bad as originally suspected?

    The Federal Reserve appears to be much more accommodating which is supportive for the market. Historically, stock markets often begin rising before profit growth improves (speculation by investors) and it is possible that we are witness to such a phenomenon at this point. If that is the case the market lows of December would not need to be revisited and the bull market will continue to be alive and well for now.   Over the next few weeks, I will be watching earnings and economic data points for confirmation that this is in fact true. If that is the case, I plan to use any temporary weakness in stocks to become more invested.

    A normal market correction is way overdue
    Both bullish and bearish professional investors agree that we are way overdue for a normal correction in stock prices after such a strong rally and we should use that weakness (combined with a more supportive outlook) as an opportunity to reinvest. Upcoming negative earnings reports will probably be the catalyst of a normal correction. A normal correction (8-10%) would provide an opportunity for our performance to get back in line with markets (I am looking forward to that!) and set us up for a strong and profitable year.

    It is possible that all the bad news hasn’t been fully priced into stocks
    The alternative and less optimistic case to the one described above is that stock prices at current levels are not priced correctly (too high) for the upcoming (negative) data on both economic growth and earnings. In this scenario, stock prices would adjust downward, most likely closer to the lows of December and possibly lower. Though the recent market strength is encouraging, stock prices have failed to reach previous highs and, in some sectors, are nowhere near those levels.

    From a purely technical level (looking at charts) the market has struggled in recent weeks to make any serious progress which may be a sign of an upcoming correction or perhaps something worse. As I have reminded investors, bad or “bear” markets don’t take long – months not years – but average declines are close to 40%. I want to ward against this type of loss by advising you be less invested as you are today, but also take advantage of the great bargains that become available after bear markets, which your more defensive posture will allow you to do.

    It isn’t easy being less invested during a temporarily rising market. However, historically, the outcomes have sided with patience.


    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.



  • Global Stocks Rally Off Lowest Levels: Is It Safe to be Fully Invested?

    Over the past six weeks, global stocks have staged a significant comeback. After being down nearly twenty percent in late December (bear market territory), indexes have climbed half-way back to their previous highs (see chart below). Much of this recent gain can be attributed to the Federal Reserve being more sensitive to what is now obvious: the global economy has been decelerating along with corporate profits, neither good for stock prices.

    In addition to the Fed’s accommodation, there is swirling speculation (mostly optimistic) that another US government shutdown and harmful trade negotiation outcome can be averted. I have taken a more defensive position during the past few months – which can be trying given the most recent upward trending market. Is the recent market strength a sign that “all is well” and we should be once again fully invested (up to your asset allocation)? Or is the recent strength just a temporary “relief” rally to be followed by a decline?  Let’s look at some data points.

    MSCI World Stock Index (1 year)

    Short Term Trends and Fiduciary Responsibility
    Although the recent market strength is welcome, investors should be careful about assuming that short term price movements dictate the health of the underlying economy and corporate profits. Short term (weeks) movements in stock prices should also not be used to predict the health or future direction of stocks, as tempting as it may be.  For instance, a decline in stocks during a bull market can appear to lead one to consider selling, just as a temporary rise in stocks in an unhealthy market can lead one to go “all in” – both bad ideas.

    In my view, investors would be best served by confirming that the basic fundamentals of a healthy economy and stock market justify being fully invested in the stock market.

    The Slowing Economy and Profits Picture
    If the global economy can slow down to a consistent “cruising speed” of 2% annually and the Fed stays accommodative, we believe that – with corrections along the way – stocks can go higher this year.

    However, at this point, the downtrend in economic growth and earnings has not shown signs of slowing.  Today, for instance, the big industrial company Caterpillar warned of weaker than expected sales. In my view, a continuation of weaker than expected economic statistics and profits can easily send markets lower and your first priority for your assets is to mitigate significant downside risk.  I will be watching all the data points in the coming days and weeks for signs of stability.

    Trade, D.C., Brexit, etc.
    Each of these factors played a role in the market’s decline and subsequent recent market strength – depending on nothing but short term speculation. Investors would be wise to consider the potential negative impact that these events could have on the health of the economy. I will also be watching these data points over the course of the coming days and weeks.

    Is Recent Market Strength Sustainable? Is a Market Correction Overdue?
    In a bull or bear market, stock indexes have periods of short term strength (rallies) and weakness (corrections). Interestingly the recent strength in stocks has not been accompanied by any clarity on the issues discussed above, except for positive Federal Reserve commentary. The strength, however, has been significant and has reached a point by many measures I consider to be overextended. So yes, a correction or decline in stock prices is probably overdue at this point.

    Should You Buy Shares in Great Companies During the Next Market Correction?
    If the economy and profits appear to be on better footing and trade and government shutdown risks dissipate, the answer is YES. A moderate stock market correction, with better fundamentals, would remove recent underperformance and allow you to buy some of the world’s best companies at great prices. On the other hand, in the face of continued deterioration in market fundamentals, continue the tact of keeping “safer than sorry.”

    A Profitable 2019
    It is important to recall those periods of tough economic climate and bad markets are not long affairs (months not years). In my view the stock market will soon – if it already hasn’t done so – discount the worst-case scenario for the economy and corporate profits, leaving you plenty of time to make great strides in growing your wealth during the course of the year ahead and the many years beyond.




    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon