Have You Hugged Your Asset Allocation Today?
October 28, 2018
First of all, I would like to thank our clients and readers for not panicking about the market. I believe that it is a result of our having reinforced the role of asset allocation in holding volatility to acceptable levels across a spectrum of investment profiles. It is never comfortable to ride through a correction period; however, volatility is the cost of making market returns. It is my opinion that recent volatility is a result of the following uncertainties:
- Will the Fed inadvertently choke off the economic expansion? Probably not. Interest rates have been too low for too long, and it is about time that we have entered a period of rate hikes. There are too many “Zombie companies” out there. (“Zombie companies” are companies that are dead but have yet to lie down, as cheap capital has kept them upright.) The economy is more than strong enough to justify these rate increases.
- Capital markets hate election seasons. Uncertainty is the curse of markets, but we are close to resolving this situation on Election Day Nov. 6.
- Our progress has been slow in negotiating new trade deals, kindling fear of trade wars. I believe this is somewhat overdone given our very strong position in the global economy.
On the plus side:
- The economy is going gangbusters. The employment picture could not be better; wages are increasing; an acceptable level of inflation exists; GDP growth is robust, as is the corporate earnings growth rate.
- Corporate valuations as measured by several data points are in line with long-term averages. The indexes are certainly not expensive.
- While there will almost certainly be a slowing of earnings growth in 2019 and 2020, they are still at robust levels.
- Consumer confidence is very strong.
- Measures of business strength remain high.
- Capital spending is signaling that companies are in an expansion mode.
In spite of the above positive points, market volatility is breathtaking. I see the only way to cope with volatility is with your asset allocation. People who are over-allocated to stocks are the people who end up selling at the bottom and buying back after a run-up, so it is absolutely critical to have an allocation you can live with and not be tempted to sell out on the down days or buy in on the up days in an attempt to chase returns.
As always, we would be happy to discuss any of this with anyone who would like to give us a call or send us an e-mail – firstname.lastname@example.org.