Clients of the Firm,

Fall has arrived and with it a shift in the winds of politics has grabbed most headlines.  Markets have been swayed by every breaking news event, ranging from whistleblowers and impeachment inquiries, to China trade talks and candidate health issues.  Certainly, there is no lack of news cycle to move markets.

Rather than focus on these short-term headline risks, this letter will focus on the coming shift in money management dynamics driven by three important macro policy issues.  These issues are: the future capacity of central banks to influence markets and asset prices, the need for fiscal stimulus to offset it (the funding of which may attempt to re-balance the wealth gap) and the negative drag of global protectionism and consequent currency war.  The resultant policy implications are uncertain and long-tailed, but merit examination as we plan for future investments, asset allocations and risk management.

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Clients of the Firm,

Markets

The first quarter of 2019 was higher for domestic equity markets, as the market rebounded from the pronounced decline in Q4 2018 and are now approaching the highs achieved in early October 2018.  Earnings for the S&P 500 are expected to decline for Q1 2019 by -4.2% according to Factset consensus.  That said, the balance of the year is expected to see an increase of earnings and revenues bringing S&P 500 earnings in-line with our current forecast of $173 or +7%. 

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Clients of the Firm,

Many clients are asking whether or not now is the time to reduce or eliminate equity holdings as a result of the clear change over the last three months in market sentiment.  December is on pace to be the worst performing December since 1931 and in the top 50 worst performing months of all-time.  The declines are sharp and sudden and this can cause concern for many investors.  In addition, the markets have entered negative territory for the year with the S&P 500 down about 5% as of this note. 

This moment seems like a peak of negative hyperbole to us, but we agree it is concerning to hear the chorus of negative sentiment from noted investors and past Fed Chairs. Our view is that there is tremendous uncertainty in the news cycle compounded with the drama and policy confusion currently in Washington.  The issues range from the China trade war, government shutdown, Mueller probe, change of control of Congress and what the Fed will do tomorrow…the list goes on.   

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Clients of the Firm,

Markets

As we begin the third quarter, the domestic markets continue to be range bound with the DJIA down -1.87% YTD and -8.85% off its high and the S&P up +1.56% and -5.45% off its high.  The 10-Year Treasury yields 2.85%, which is about 25 bps lower than its recent high.  Indeed, in the US, it has been a year of ups and downs so far in 2018, with the net result largely running in place.

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Clients of the Firm,

As we start the second quarter of 2018, volatility continues in the market, precipitated by fears of a trade war with China through tariffs and the response to the Fed tightening cycle.  Last night, the Trump administration proposed tariffs on over $50 billion of China’s imports.  This proposal would assess levies on 1,300 categories of products.  Tariffs of 25% would apply to goods from medical equipment to chemicals. 

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Clients of the Firm,

The steep decline of over 11% in the market from its peak this week gives us pause, of course.  Corrections of this speed are fairly rare.  Yet, many corrections have happened of this magnitude in most bull markets.  In fact, we have seen several declines like this even in the bull market we have recently experienced since March 2009.  The obvious question is: Will this time be different?

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Clients of the Firm,

A new US tax bill was signed into law just before Christmas in 2017, bringing with it a myriad of questions and considerations as we enter 2018.  The impact of the tax law on the stock market, bond market, and Fed is still uncertain at this point, but initial indications is that it is positive..  Entering 2018, the stock market is at all-time highs. We continue to see the prospect of future potentially positive economic news fueling further gains, although at a more measured pace.  Finally, the likelihood of higher inflation and higher interest rates has increased for the coming year as synchronized global growth and the Fed’s tightening policy begin to have impact.        

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CLIENTS OF THE FIRM

The third quarter of 2017 ended with stock markets at record notational highs.  This fact, again prompts us to look at the risk/reward tradeoff that characterizes successful long-term investing.  Much of the current environment is supportive of stock prices although prices are now at the high end of historic ranges with the S&P 500 trailing P/E ratio of 24.22 and forward P/E ratio of 19.19.  Bond prices remain well above normative ranges and consequently bond yields remain depressed, at least for the time being.  US GDP growth was 3% for the 2nd quarter ahead of the trend 2% level for the past several years.  Unemployment is near record lows and manufacturing activity has picked up recently. In addition, the potential for both corporate income tax cuts and repatriation of overseas assets has enhanced bullish sentiment.   Notwithstanding the daily political turmoil, these data points have led many to believe that the elusive escape velocity of the US economy may finally be at hand, thereby justifying current stock prices and elevated forward P/E ratios.

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CLIENTS OF THE FIRM,

The first half of 2017 has been punctuated by political and international drama.  While this has been noisy and created consternation for both right and left, it has failed to derail the equity bull market particularly in technology.  Here, earnings have accelerated and we are finally seeing an amplified cannibalization of traditional business, particularly brick and mortar retail.  Earnings for the first quarter were solidly in-line or above expectations for the S&P 500 and dollar-strength was contained.  Interest rates, while rising substantially above pre-election lows, remain at levels that are well below normative ranges.   

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CLIENTS OF THE FIRM,

The first quarter of 2017 has largely played out according to our expectations with assets behaving in a manner consistent with the unfolding political landscape.  While in the past week market sentiment has shifted somewhat, the underlying economic conditions remain sound and supportive of investment.  This letter will focus on the shifting political landscape, stock and bond prices and the value of the dollar and what to do with a correction in prices. 

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CLIENTS OF THE FIRM,

As we near the end of Summer and the leaves turn amber and brown, permit us to wax a bit poetic at the season that was and what the turn of autumnal clock may bring for our investments. Recently, several macro-economic themes have become clearer as they often do when the mind opens and we turn the page of the calendar.  We will try to distill them here.

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