The last two weeks have been volatile with concerns about the US / China trade war and yesterday’s news about the 10 yr rate and the tilting yield curve is an early indicator of a potential recession.
Many of you will have questions regarding whether you should be making changes to your portfolio, so I will attempt to shed some light on what is happening, and what I have done to prepare my clients.
Attached is a link to a piece we published last week concerning the US / China trade war.
With regards to interest rates, the yield curve is one of 6 early indicators we look at: by no means is it a certain thing… but if it is accurate, the time frame before a recession comes is usually 12-18 months down the road. So even though we are seeing negative market activity, we still expect the market to grow from its current level.
If you remember, the market rose very high and very quickly early in the year. At the end of March I decided to pull back all my portfolios and make them more conservative. I moved them to a "neutral" position. This was based on our opinion that we were (and still are) in the late stages of a bull market. We still saw an upside in the future, but it was time to prepare for a slowdown. We also thought it very likely that there would be volatility in the short and medium term, and a “correction” would most likely take place. A brief one occurred a few months ago, but the market quickly recovered. It then continued to move up with little volatility, and steady “un-checked” upward movement.
I’m simplifying this next statement as a generalization of the overall market, but this “un-checked” activity refers to when the market trades mostly on good news (up) and bad news (down), but with no real true valuations of stock prices and it becomes a little out of touch with reality. This usually leads up to a point when a shock comes in some form, investors have a knee jerk reaction and sell, and then search for a bottom and a true value of the stocks starts. This is a correction. This appears to be what we are witnessing right now.
For the individual stock portfolios that I manage, many of you will see that I have been carrying a cash position (from sells I made in March), but I added 3 defensive names a few weeks ago. These are stocks with steady cash flow that stand up well during negative times. We also rebalance the portfolios at least quarterly, which solidifies gains and keeps positions in line.
This is a good "gut check" time to see how you feel about the volatility. I have prepared my clients portfolios for what we experiencing. Reacting during the times like this is rarely a good idea, but if you are uncomfortable with your portfolio, reach out to us and we will set up a time to review and discuss changes we can make. That said, focusing on short term fluctuations of one part of your portfolio is not a good strategy. Take a step back and look at all of the parts working together, both equity and fixed income, over a longer period of time. Most portfolios are still doing very well YTD, and if you have fixed income in your portfolio, times like we are seeing is what they are used for.