November 19 2019 Market Update

Gross Domestic Product (GDP) growth, a measure of economic output, came in at below 2 percent on an annual basis for the third quarter. We also saw a slowdown in the services sector, which follows several months of weakness in manufacturing. At the same time, job growth came in higher than expected and average wage growth is positive and stable.[2]

In other words, the data are mixed – as they have been for some time.

Market participants consistently try to read these mixed signals and figure out what trends are the most important for the future. As an investor, what are you supposed to do when the talking heads on TV are interpreting the same numbers in different ways?

Here’s what we suggest.

Look at the Long-Term

While recent data have, to a minor degree at least, pointed to a slowdown in economic output, the Fed’s recent rate cuts offered a measure of support for the economy.[3]

A key open question is what will happen with trade – and what the impact of those decisions will be on the local and global economies.[4] Will an ongoing stalemate begin to impact business decision-making and growth opportunities? Will consumer spending and confidence decline?

We don’t know the answers to these questions. However, even if the short-term outlook were completely sunny, we believe investors should look over a broader time horizon.

One thing you’ve probably heard us say before is that markets go up and markets go down. The same holds for the business cycle: we are currently in the longest economic expansion of the post-war era.[5] In our view, it does not make sense to assume that this will continue forever.

That said, it’s difficult to gauge what a slowdown will look like and when it’s likely to happen. There are just too many variables – and as we saw in 2008, even the best and brightest didn’t see the financial crisis coming.

This doesn’t mean we simply accept the slings and arrows of every market environment: it just means that risk management is a very important part of any investment policy.

Take Advantage of Risk Management

We’ve already seen signs of concern in US manufacturing on the heels of trade uncertainty.[6] Depending on the various policy steps taken by global governments to bolster their economies, there are many different ways the current environment could evolve.

This is obviously a complicated knot to untangle.

Instead of becoming mired in short-run economic news, we recommend that investors with longer-term needs manage their portfolios with longer-term economic, market, and business risks in mind. For comprehensive risk management, it’s important to add your own personal risk factors, too.

Your resulting investment policy will likely be more robust, methodical, and tax efficient as a result.

This is a valuable exercise because no matter how optimistic you are about the economy or the markets, the environment can change – sometimes rapidly. It makes sense to balance your exposure to different types of risk in a disciplined and data-driven way.

Stay Disciplined

For many investors, one of the most difficult aspects of having a formal investment policy is sticking with it. This is especially the case when markets are going strong: when the S&P 500 or other equity index is up significantly, it can be difficult to feel that you’re underperforming.

Of course, that “underperformance” is likely to be the result of diversification, which limits your exposure to a single asset class or sector. The goal of diversifying is to benefit from performance across the investment landscape – and to offer a buffer against falls in individual asset classes.

But for diversification to work like it’s supposed to, investors need to stay disciplined. This means adhering to the long-term plan despite short-term news, regardless of whether it’s positive or negative. While we believe in adapting and evolving investment strategies over time, we do not believe in reacting to day-to-day news.

Again, this can be difficult: we’ve all seen the way talking heads on TV can get carried away in their pursuit of higher ratings. But, for an investment policy to work, it needs to be built and managed in a disciplined way through natural market volatility.

Ask Questions and Ask for Help

Investment management does not need to be overly complicated, but it is something that we believe requires a methodical, data-driven, and prudent process. It also benefits from communication and understanding.

We welcome your questions about the current market environment and the economic context around it. In our experience, investors who understand the “why” behind their investment strategy are more likely to see the value in steps like risk management, big picture strategic thinking, and discipline.

Please reach out as we head into the end of the year and 2020 to schedule your year-end review – and don’t forget, now is also the time to ask your tax preparer for year-end tax projections!

Best wishes for a wonderful Thanksgiving holiday together with friends and family.

JSF Financial