It remains difficult to maintain a pessimistic outlook on the U.S. consumer, and therefore on the U.S. economy, given the broad data tied to the labor market, wage growth, retail sales, and overall consumer and small business sentiment figures. The specific catalysts for equity market volatility over the past few weeks have been difficult to pinpoint. Slowing growth in Chinese exports may have been such a volatility catalyst during the week despite news that Chinese imports, from the U.S., indicate a resumption of soybean purchases. Such import data may be a sign for stronger optimism tied to the potential for renewed and actionable trade talks with the U.S. Whatever the case may be, it’s important to note that there appears to be no concrete objective assessments that domestic equity markets should be experiencing notable and elongated downside pressure. Recent data is indicating that many retail investors have pulled exposures away from equity investments and into perceived safer investments, such as cash and fixed income. This poses a problem, in our view. For starters, the notion of when to put such cash back to work becomes an emotional and subjective assessment for many investors. Failing to proactively determine the catalysts for increasing risk exposure can have a detrimental long-term performance effect. The second issue we see is that many investors are viewing the recent volatility as abnormal. Although we would agree that the backdrop of the volatility is abnormal, the fact of the downside itself is a very normal event. If we exclude the rolling volatility figures of the previous two years, which were unreasonably low, we find that the current cycle is within normal range of what volatility has the ability to do. What we’re also seeing across investors is the notion of recency bias, which is a cognitive assessment of the most recent past in terms of what’s the worst that could happen. Meaning, the vast majority of market participants are correlating volatility with what we experienced in the latest recession of 2008-2009. The fear that there could be a repeat, similar to the recent past, has been a dominant factor when faced with downside volatility in the current environment. As we gauge that concept, we want to reiterate that there remains no evidence that such an event is currently possible. There are no signs of economic bubbles (as gauged by rolling sector changes of price-to-earnings ratios), there are no signs of a struggling consumer (as gauged by a robust labor market and wage growth along with the highest voluntary employment quit rates since 2001), and there are no impeding signs that earnings growth will come to a halt (it may slow, but not halt). We urge patience and rational risk management.
As it relates specifically to last week, domestic equity market downside proved worse than that of international counterparts. The large capitalization Standard & Poor’s (S&P) 500 Index closed the week lower by -1.22% while the small capitalization counterpart (S&P 600) lost -2.93%. Unlike previous weeks, volatility from oil price pressure was not a decisive factor to performance attribution. Brent crude oil prices remained flat for week following the recent -35% two month slide. The U.S. dollar remained elevated with minor upside pressure remaining intact. The dollar’s effect for U.S. investors utilizing international assets has been a dominant performance factor for the year and the likelihood of its persistence remains slim, in our view. Our ‘View of 2019’ publication will be available soon and we remain relatively optimistic for a neutral, or weakening, dollar for the coming year. Further developments tied to trade talks can also have the ability to sway the dollar’s strength.
Investment Policy Committee:
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.