(The following is an excerpt from a letter sent to my private wealth management clients on 10/22/2019)

Today’s headlines are overrun with impeachment unrest, Hong Kong protests, tariff wars, Brexit bewilderment, an inverted bond yield curve, U.S. economic growth cooling, weak exports, and a contraction in manufacturing.

At the same time, we are experiencing the strongest labor market in several decades with the pace of layoffs and the unemployment rate near a 50-year low. Consumer spending has been extremely strong, rising an estimated 4.6% year over year. Interest rates are incredibly low, while corporate profits and the stock market have gone up, up, and away!

Economists are hardly in consensus, but many predict that the economy will continue to grow through the end of the year at least. Beyond that, some predict a recession, while others think a “China Deal” could have us cruising to new highs.

Ahhh…what interesting times to be an investor!

What does this mean for you? While markets were relatively stable for the quarter, portfolio returns are impressive year to date. You can check out more detailed information about the market in a presentation here.

Value vs. Growth

One market dynamic that we’ve been studying, which is in part spurring portfolio allocation changes, is the strong out performance of company stocks that analysts categorize as having a “growth” style in comparison to “value” over the past 10 years. It is not altogether surprising that growth stocks would lead the way following the financial crisis of 2008, but this trend has now run an abnormally long time. J.P. Morgan recently stated, “value is currently trading at its biggest discount ever, and offers the largest premium over the last 30 years.” These types of trends can run for a long time, but we are confident that value stocks will regain leadership at some point.

This informational piece from AMG Funds does a nice job of pointing to the valuation differences and also showing historical return differentials with wide divisions between the two equity styles. Over the long haul, value stocks have done quite well. Jared Kizer, CFA points out that from 1927-2017, value stocks outperformed growth by 4.8% per year! I have long favored managers, such as First Eagle, Thornburg, and Warren Buffet of Berkshire Hathaway, who follow a value discipline, and we are now migrating portions of core market-based index holdings to offerings from Dimensional Fund Advisors (“DFA”), which have a value stock overweight.

Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Indices are not available for direct investment. Their performance … — Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
In US dollars. Yearly premiums are calculated as the difference in one-year returns between the two indices described. Value minus growth: Fama/French US Value Research Index minus the Fama/French US Growth Research Index.
Fama/French US Value Research Index: Provided by Fama/French from CRSP securities data. Includes the lower 30% in price-to-book of NYSE securities (plus NYSE Amex equivalents since July 1962 and Nasdaq equivalents since 1973).
Fama/French US Growth Research Index: Provided by Fama/French from CRSP securities data. Includes the higher 30% in price-to-book of NYSE securities (plus NYSE Amex equivalents since July 1962 and Nasdaq equivalents since 1973).

“May you live in interesting times.”

Superficially positive, this phrase—once believed to be a Chinese curse—was actually delivered with the intention of wishing another person a life filled with turmoil and stress, as opposed to peace and tranquility. Linguistic detectives dug into its origin, and found that it wasn’t an ancient Chinese curse at all; instead, the phrase appeared to have first been used in England in the 1930s.

Similarly, It’s also a natural, but false, assumption that investing during “interesting times” can be a curse. During times of disruption, investments often become more favorably priced, which can lead to greater returns going forward. Also, although “interesting” economic periods may feel cursed, the creative destruction process has, indeed, led to the creation and development of new industries and technologies that drive our economy forward.

Through both good and bad/”interesting” times, history shows the markets persevering upward. Take a look at the chart from First Trust below, which provides a strong visual reminder of the wealth-building power of markets despite the parade of negative new events.

First Trust - Markets in Perspective 6-28-19.jpg

With that said and even with our recent positive investment numbers, it’s important to always plan ahead and prepare for the inevitable market downturns and pullbacks. Selling out to avoid downturns is not the game plan; instead staying invested through good and bad times with well-diversified portfolios is what has worked in investing.

As always, if you have any questions or would like to discuss anything further, please contact me at Scott@CahillFA.com or (952) 926-1659.