Well into our fourth decade of advising clients, we have usually been confident that taking a few days off here and there during the summer months wouldn’t be a big deal. This summer seemed to buck that trend.
A seemingly endless torrent of information has emerged, with a cool disregard for anyone’s vacation plans. In our digital age of hyper-connectivity, we’ve witnessed an unending flow of economic data (jobs, GDP, inflation), geopolitical events (NAFTA, EU, Turkey, North Korea, China), and yes, news from Washington DC.
Another much-appreciated “interruption” to this summer was a US stock market that seemed to defy gravity. Although we invest our portfolios globally, it is hard to ignore the fact that US corporate profits have been rising, and the economy seems to be chugging along nicely. As fiduciaries charged with the weighty responsibility of making sure our clients’ assets are protected, we need to pause and ask, “how much longer can this last?” We believe the answer is informed by our investment process.
Our process is rooted in a keen understanding of where we are in the business cycle, and consequently, how we should diversify our portfolios. The ClearRock Economic Dashboard™ (CRED) is the primary tool we’ve developed over the past decade to accomplish this meaty task. CRED allows us to thoughtfully parse multiple economic indicators and arrive at a close approximation of “where we are”. What made this past summer particularly challenging is how long this economic expansion has persisted.
CRED has been a useful indicator over the years. Recently, it has been telling us that, while we are still in the expansion phase of the cycle, the rate of the expansion has begun to slow. In addition, many of the conditions that have marked the end of previous bull markets aren’t currently in place, but a few of them are developing: speculative buying in some sectors, rising interest rates, and a shift to more defensive sectors. One other important consideration is the surprisingly large increase in our federal debt, which could readily introduce inflationary pressure in the future. David Rosenberg, chief economist at Gluskin Sheff & Associates expects the current budget deficit, currently at 3% of GDP, to double by 2020, while at the same time our debt-to-GDP ratio will exceed 100%.
As we wrote back in April, the portfolios that have served investors well in the past may not continue to do so going forward. Our “most likely” case is this:
1) the Federal Reserve has ended its “easy” monetary policy, so rates will continue to inch higher;
2) economic slowing will eventually follow, so profit expectations will have to be adjusted lower; and
3) the gravity-defying stocks of the last few years will have to re-enter the earth’s atmosphere, triggering a move out of momentum stocks into those with more defensive traits such as those paying steady dividends.
Our conclusion is that while the US economy is healthy, we are closer to the end of the current business cycle expansion. Consequently, in the coming months, as additional data confirms our outlook, we will begin the gradual process of shifting to a more defensive investment position across all of our portfolios. Timing is an impossible task. That’s why we tend to make subtle changes in our portfolios rather than trying to pinpoint a moment in time. Paraphrasing the words of the late economist, John Maynard Keynes: we would rather be vaguely right than precisely wrong.
As always, please feel free to contact us with any questions or comments. We greatly appreciate the trust you have placed in us and will strive to earn it each and every day.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from ClearRock Capital, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.