A recap of the week ended October 26th.
One of my favorite songs growing up was Elton John’s Crocodile Rock (Side A). Released in 1973 on a 45 rpm, it was paired with Elderberry Wine (Side B). Crocodile Rock went to #1 while Elderberry Wine was panned by most critics, forever banished to the Side B junkyard. Last week, every big story peaked like a #1 hit record capturing the attention of media and public alike. Meanwhile, over on Side B, those in the investment community who subscribe to a diversified approach to investing, probably finished the week scratched, unbroken and ready for another spin around the turntable.
During the course of any given week, I try to focus on what seems most important as it relates to the work I, and everyone at Clearview Wealth Management, do for clients. This typically means tuning in to a few key economic data points, some global geopolitical news and, as a little diversion, a few sports’ stories. My view being, short term market and news cycles will always be with us, but over time, the peaks and valleys historically wash out and produce slow, yet steady growth. That and my commitment to diversified portfolio strategies, tends to lessen any anxiety I might have at the close of a work week.
My strategy was put to the test last week. It had just about everything you could imagine including pipe bombs, a 3.5% GDP growth rate, the start of the World Series (I lean NL), a $1.6B Mega Millions winner (in SC no less) all wrapped up with the S&P 500 finishing 10% below its last record. That would put it in correction territory for the first time since February. Not to make light of a very newsy week, I finished the day on Friday taking comfort yet again, in our diversified investment strategy. Volatile markets generally produce more losers than winners and we had both. However, generally speaking, portfolios held up well relative to the S&P 500 declining approximately half as much as this broad US equity benchmark[i]
The Right Mix Matters
As I have been telling my clients for the past 6-9 months, the current business cycle is either entering or is already in, its latter phases. Key economic indicators have little, if any room to improve and the Federal Reserve (Fed) has made good on raising interest rates, with more likely on the way. That’s not to say the economy is poised to stop growing, but last week suggested the stock market may be entering a more volatile phase, motivating a more cautious approach. With that as a backdrop, we have decided to make a few portfolio changes that might prove to have merit in the coming months.
- To counter Fed rate increases, shifts will be made to reduce intermediate bond positions in favor of those with shorter maturities.
- In hybrids, a reduction of equity-leaning positions to more defensive, market neutral holdings.
- Sector specific, industrial (late cycle) and regional bank (interest rate sensitive) holdings will be shifted to more broadly diversified equity exchange traded funds (ETFs), mutual funds and/or cash.
During 2018, many portfolios have incurred capital gains, while others continue to hold unrealized gains. Last week’s market decline may provide the opportunity to harvest losses or rebalance without incurring significant, additional gains and the subsequent taxes. So, as we always do during the 4th quarter, steps will be taken to review client portfolios with an eye to harvesting losses to try and offset earlier gains and to facilitate some year-end rebalancing.
Try to Ignore the Critics (and the news cycle)
I always enjoy reading The Intelligent Investor by the Wall Street Journal’s Jason Zweig. Friday’s commentary, “What Investors Can Learn from Gamblers”, was a bit heavy on gambling and light on investing but in my opinion, tied together nicely, the interaction between human behavior, gambling and investing. In the article, he writes, “Probabilities are pallid and impersonal. Money is vivid and emotional”. Taking some liberties with re-sequencing his words and adding my own seems like a good way to close. Last week’s news, like money, was vivid and emotional. Our allocation strategies and the investments used to add diversity, like probabilities, can be considered pallid and impersonal. We don’t underestimate how challenging it can be to ignore what are often alarming headlines, but we trust a diversified portfolio to win out in the long-term.
 Jason Zweig, The Intelligent Investor; Wall Street Journal October 26, 2018
[i] For the week ending October 26, the S&P 500 was off 3.93% while a Balanced 50 portfolio declined 2.04% or approximately 52% (half as much) of the total S&P 500 drop. Return figures are from Morningstar. Client portfolio performance may vary due to variations in investment positions and/or the timing associated with purchase. Clients should inquire with their Financial Advisor about their own portfolio or investment performance.