August 2019 Strategy Changes

As the summer of 2019 concludes, we find the investing landscape less clear than when the summer began.  Escalating trade tensions with China, signs of slowing economic activity, and overly optimistic corporate earnings estimates have led to the need for a change in our investment strategy as we move into the fall.

Trade Tensions Escalate

We were hopeful a trade deal with China would be coming by the end of 2019.  Instead, we find the two sides using more aggressive tactics to “win” the trade war.  In our opinion there are no “winners” in a trade war.  It only serves to cause economic uncertainty and higher prices for consumers.  China has begun to devalue their currency in an effort to reduce the sting of U.S. tariffs.  By lowering the value of their currency, the price of exported goods and services from China become less expensive, negating the intended impact of tariffs.  Experimenting with currency devaluation is not a tactic we take lightly as it can have larger negative regional impacts.  With this level of escalation, it is our opinion that the trade wars between the U.S. and China have entered a more destructive chapter which warrants caution. 

Strategy Changes

The negative impacts of the trade war with China are becoming more evident in corporate earnings and economic statistics.  It is not so much the impact of the tariffs themselves, but the lack of visibility into the operating environment for companies that has a way of stifling growth.  Add this to the backdrop of a decelerating global economy and we have reason for concern.  While we believe an economic recession is unlikely in the U.S., the odds are growing in our estimation. 

Since the fall of 2016, our equity positioning has been aggressive, favoring growth stocks given our optimism surrounding corporate earnings growth, the positive impact of inexpensive credit and tax cuts.  This move proved to be beneficial as the stock market rose over 18% annualized since early 2016.  We believe it is now time to shift our positioning to a neutral risk stance in hopes of mitigating future potential downside and growing volatility. 

We will be adjusting our model portfolios to strive for lower volatility and downside capture.  The weighting to our most volatile investments will be reduced and replaced with investments which seek to capture less downside if markets further decline in value. 

Investment Principles at Work

Two of our most important investment principles are evident in these decisions:  Humility and Flexibility.  The future cannot be known for certain, therefore we must have humility when exercising judgements. Since we cannot know what direction the market will go in the short term, we do not attempt to time the markets by selling out of an investment which is in place to generate long-term gains.  We do however adjust the amount of risk suitable for each economic environment in an effort to limit downside when uncertainty is prevalent.  Our team works diligently to eliminate emotions, pride and ego from the investment decision making process. 

Our process is established to allow flexibility as market conditions change.  If the trade war escalates to levels unsafe for financial markets, we may further reduce risk, going as far as raising cash should permanent loss of capital be anticipated.  This scenario is very unlikely in our opinion; however our team is evaluating the current situation on a daily basis and stands ready to make further changes if warranted.

Summary

We are grateful and humbled by the trust you have placed with us and our investment team.  We continue to invest resources back into our process, adding tools and personnel to aid in improving our efficiency, timeliness and research.  As always, feel free to reach out to any of our team members should you have questions regarding our strategy or outlook.

 

 

Investment advice offered through Merit Financial Group, LLC, an SEC Registered Investment Advisor. 

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to affect some of the strategies. Investing involves risks including possible loss of principal.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.