And the winner is… Cash!
In 2018 cash outperformed stocks and bonds for the first time since 1994. 2018 proved a bear of a year (pun intended). 2019 will perhaps be just as exciting.
While everyone seems to want to talk about recession, we are less interested. Sure, a recession looms, as It always does. We are 10 years into a recovery and it’s likely a recession is closer than we think, but unlikely in the next 18 months.
The fourth quarter was filled with drama, much of it unnecessary. There is little we can do regarding trade wars other than wait and react. We have seen what appears to be the result of the trade tensions on global growth, but without more decisive proof or a final decision on policy we must be defensive and patient. This will be a key driver to stock market performance and economic growth in 2019.
During the fourth quarter we generated substantial cash and for taxable accounts we focused on tax loss harvesting. Confident we were not heading into a recession we considered the sell-off temporary. As valuations improved, we slowly put that cash back to work in areas and companies we believed to be over sold and attractively valued. While concerns over growth will continue to rise as the Administrations decisions add to uncertainty, we believe the December lows provided an opportunity to buy at much better valuations and the likelihood a recession is far enough out, providing an opportunity for growth in the portfolios. We still have some cash left and wait for more clarity to add further.
Markets were relieved to hear from Fed Chair Powell on January 4th when he said, “With the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves”. If the Federal Reserve appears to change policy to favor markets or the President, it will lose credibility - that does concern us. One of the most important Fed accomplishments has been to anchor inflation expectations near 2%. This has been key to economic and market stability for decades. While many would argue the Fed has in the past been responsible for recessions, the truth is far more complex. If this market can’t sustain a normalization of interest rates 10 years after the Great Recession – that’s a concern. It appears that the market continues to be insecure about going back to a free market and the sustainability of our economy, while the Fed has more confidence the economy can stand on its two free feet. We believe the Fed is right but has a communication problem.
We are concerned about the Government shutdown, national debt, and the Tax Cuts. First, the shutdown has historically proven to be uneventful, but historically our leaders were desperate to make a deal and shutdowns have been short lived. Measuring the impact of approximately 800,000 hard-working federal employees’ not getting paid misses the point. We have yet to test the multiplier effect on small businesses and sentiment. While we brush this subject as practitioners, we have friends, family and clients affected by the shutdown and fully support them getting back to work and getting paid – their livelihoods shouldn’t be used in this way.
The Tax Cut plays into the National Debt discussion. We are living through a very important experiment. Will the sweeping Tax Cuts have their intended effect of creating so much growth as to simultaneously increase tax revenues to the government and just enough inflation, reducing the debt? The National Debt affects bond markets, inflation, monetary and fiscal policy, social benefits and those who depend on those benefits. While the pundits like to assume, we’ve already seen the effects of the Tax Cut, it likely needs more time.
The fourth quarter has challenged investors and left consumers, investors and business owners less confident. Employment continues to be a bright star. The unemployment rate rose because Americans that were not participating in the labor force (those able to work but not looking for a job), came back into the system and quickly found jobs.
So, as 2019 kicked off we had been adding to our equity positions, reducing risk in fixed income, and taking advantage of higher short-term interest rates for safety. We remain positive on the economy and patient as we muddle through poor leadership, erratic governance, and pending policy. This will be a bumpy year.
We should once again remain cautiously optimistic.
Eddy Augsten CAIA, MSF – Co-founder WealthEngage, Branch Manager RJFS
Any opinions are those of Eddy Augsten and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice.