The first quarter of 2019 completely reversed the fall in stock prices that occurred in the latter part of 2018.   My “educated guess” that market traders had employed an “itchy trigger finger” at the first sign of negative economic data proved true.  I rush to add that my guess could have proven wrong and our long-term rates of return would not have been profoundly affected.  Volatility is the price we pay for the higher long term returns that equity investing gives us. Let this most recent (and inconsequential) market convulsion be a reminder to us that financial market timing is not a path to enhanced portfolio returns.

Looking forward, I am mindful of several different possible avenues for the economy and the markets.  We could see a slow-down that worsens into a recession; under that scenario, stocks would fall.  We could instead see economic growth accelerate again, bolstered perhaps by technology’s ongoing boost to productivity.  In this case, stocks would continue their historic rise.  The unusual longevity of this bull market and economic expansion support those who warn that a recession must come soon.  But central bankers’ renewed commitment to enforced low interest rates supports those who think asset prices (including stock prices) will continue to elevate.  On the other hand, low interest rates historically imply sluggish future economic growth.   As usual, Mr. Market is presently “undecided” about the future and will only reveal his decision after the fact.  I continue to believe we are prudent to cling to our prime grade common stock and to collect the (rising) dividends that we get paid quarterly.

One risk I am actively guarding against is the forgotten risk of inflation.  With cheap money continuing to wash through markets and economies worldwide, is there not the risk of a more general price experience that is like what we have seen happen to Toronto residential real estate?  In Toronto, those with housing assets have seen their wealth grow exponentially, while those who don’t own homes have been left behind.  There is a risk that something like that division is building between those who own assets (including stocks) and those who don’t.  Effective wealth management in the future will require us to navigate this growing division with care, and to ensure we are on the right side of it.

While others have been catching up from 2018’s losses, we have been building new wealth.  Most client portfolios are currently setting new high-water marks in value thanks to very satisfactory returns, enhanced by effective risk management.

 

Mark Lloyd, Ph.D.

Vice President & Portfolio Manager