The markets continue to experience increased volatility as the debate between ongoing growth and an economic slowdown continue.
Friday came and went without a US trade deal with China. Most agree that if we can get a real trade agreement in place, it will be good for the US in the long run. The questions now turn to what cost will need be incurred in the short term to reach an agreement, and how long is short term?
We know one deadline that the Trump Administration is focused on: The elections in November 2020. If the economy is still humming along as we reach election day, the incumbent party has a much better chance at remaining in office. As such, while accurate or not, we expect additional Tweets designed to encourage risk on and optimism when the going gets tough.
While trade, tariffs and tweets are the focus today, overshadowing these will ultimately be the quantifiable factors: Earnings, economy and interest rate policy.
So far, first quarter earnings have been better than the much-lowered expectations for companies in the S&P 500. A higher than average 75% of companies posted earnings ahead of estimates as of May 9 according to Refinitiv. However, growth is barely positive for both Q1 as well as estimates for Q2. After the strong rally we have seen in 2019, valuations are stretched so we believe it is unlikely we will see gains in Q2 anywhere close to what we saw in Q1 – especially without a trade deal with China.
We also believe the US and major global economies will continue to grow in the months to come, however growth is slowing. Because of this we continue to elect to take a more conservative route as it aligns with our long-term investment objective of achieving a more consistent rate of return over full economic cycles. For those in withdraw phase we continue to hold / increase cash while receiving 2%+ yields. For assets targeting longer term growth we haven’t seen a technical reason to sell, and until we do we will stay the course in our already risk-reduced allocation. That said, we have shifted from reinvesting dividends and interest, to allowing these assets to accumulate in an interest bearing ‘sweep’ account.
If you are interested in learning more about market cycles, Howard Marks recently published his latest book: Mastering the Market Cycle. His book parallels many of the concepts we follow when making investment decisions. When markets and risks are high, reduce exposure. When markets and risks are low, increase exposure. You can also find similar quotes from legendary investors like Warren Buffet, “Be fearful when others are greedy, and greedy only when others are fearful.”
If you would like to learn more about Buttonwood Financial Group’s Family CFO services and investment strategy, contact us today! Click HERE to schedule an informal conversation with our team.