The Joseph Group

Investment Update: Managing Risk and Client Objectives

December 7, 2018

Investment Update: 

Earlier this week, the advisors and investment professionals which make up The Joseph Group’s Investment Committee gathered in front of the screen in our team area and talked about what has changed in the markets during the last few trading days.

Last week, market behavior supported the idea that the typical 4th quarter rally could be intact.  Markets rallied strongly after comments from Fed Chair Jerome Powell indicated the Fed may slow its pace of interest rate increases and the rally continued after the G-20 Summit where Presidents Trump and Xi of the U.S. and China respectively indicated a pause in their trade war.  Financial stress in early 2016 ended when policies shifted after a G-20 Summit and the idea something similar could be happening this year certainly rhymed. (https://josephgroup.com/g-20-summit/)

The positive 2018 G-20 Summit news from Monday proved short-lived.  U.S. stocks declined sharply on Tuesday and have continued to be volatile following the market’s closure after the passing of President H.W. Bush.

As The Joseph Group’s Investment Committee met this week, here is just a sampling of some of the items we discussed:

  • (Good) Certain economic data continues to be strong. Earlier this week, the ISM Non-Manufacturing Index, a survey which measures the services side of the economy, beat expectations and registered the 2nd strongest reading in 13 years.
  • (Mixed) The S&P 500 undercut its previous lows on an intraday basis on Thursday and then bounced, recovering almost all of the days’ decline. On Friday, the market started off positive and as this is being written, is bouncing around the same “technical support” level.
  • (Bad) The bond market seems to be sending ominous signals about the economy. The media has made a big deal about an inverted yield curve, which we will talk more about in an upcoming Wealthnotes.  The important 2-year Treasury rate and 10-year Treasury rate relationship has NOT yet inverted but we do not like action this week where short-term bond rates have been falling faster than long-term bond rates.

We could go on, but the bottom line is there are a lot of mixed messages being sent out about the future of the economy and markets.  Also, it is important to note that points which we considered supportive of markets last week we now believe are less so.

As we look across the data, we are thankful The Joseph Group’s investment process is focused on client objectives across four key building blocks and NOT the noise of the markets.  That said, managing objectives means managing risk.  As the facts change, so will our portfolios.

Clients of The Joseph Group should expect to see trade confirmations in the days and weeks ahead as we look to take steps in certain strategies to manage risk.  Specifically, we are looking to reduce exposure to smaller company stocks and higher volatility areas of the stock market as we favor dividend-paying and value-oriented stocks.  We also expect to use the prospect of an “inverted yield curve” to our advantage by parking cash in short-term bond funds where we can earn an attractive rate of interest, but leave the option open to quickly redeploy that cash into other opportunities should market conditions change. 

Our Investment Committee has discussed multiple steps and contingency plans should market conditions continue to deteriorate or improve.  We acknowledge that in this environment, one news item or tweet can change market conditions in a hurry.  The good news is, if we have done a good job up front aligning our clients’ dreams and goals with their portfolios, we can let objectives be our guide rather than the emotions of the markets.