Our last full rebalance in September invested available cash and added to both high quality bonds and stock investments. We continue to remain fully invested and for assets not being used to provide living expenses, have only a small allocation to cash.
We remain focused on the nuances of the world economies with a watchful eye for possible recession. When taking a long-term perspective, stock markets tend to rise about ¾ of the time. Declines during the other ¼ of the time are often due to recessions. (JP Morgan: Slide 14 pictured below) As we enjoy the returns of the longest market run in our history, we have reduced overall risk but by no means have we stepped to the sidelines.
We have reduced risk in our bond investments by trimming exposure to riskier, lower rated and longer maturity bonds. Our stock investments have shifted from growth stocks, where we have been for the last several years, to value stocks; companies with cleaner balance sheets, stronger earnings and higher dividends.
In our opinion, the consumer remains the key to continued growth for the US economy. The USA has been, and remains, a consumer driven economy. About 68% of our gross domestic product (GDP) comes from the consumer. (JP Morgan: Slide 17 pictured below) With the October job growth pulling the 2019 average to 167,000 jobs/mth and unemployment near 50-year lows at 3.6% (BLS report), as consumers, we feel good about our continued employment. Add in average hourly earnings growth of 3% year/year and now we are comfortable and have the cash to spend too!
Without a strong consumer, there are plenty of items to fret about. Manufacturing around the globe remains soft, inventories are starting to build, trade wars continue to increase volatility, Europe is limping along and we are about to be bombarded with election noise. Despite these worries, we still don’t see a recession in the immediate future. The yield curve has normalized, and the initial release of third quarter U.S. GDP showed a 1.9% annual growth rate which beat the consensus expectation of 1.6% but was down from 2% in the second quarter. And while GDP reflects continued growth, economic activity has weakened since the beginning of the year.
While the core focus for the Buttonwood Investment Policy Committee (IPC) revolves around positioning of assets for the various stages of economic cycles, secondarily we track technical indicators for the markets. As we move into the final weeks of the year we will remain proactive with investment strategy. We will seek opportunities to capture losses for tax benefit; and after the recent run in the stock markets, we will also likely shift back to a “hold cash” positioning. Our logic: The recent climb to new highs in the stock markets comes on the hope for a Phase 1 U.S.-China trade deal. However, a partial agreement may not have a material impact on corporate confidence going into 2020. Earnings growth in the third quarter is still expected to be negative year-over-year (from Refinitiv), short term investor sentiment is approaching excessively optimistic levels, and U.S. real GDP growth estimates for the fourth quarter have edged down to 1% as of November 5, 2019 (Atlanta Fed GDPNow). In summary, the stock markets may be getting ahead of themselves.
As we move forward, by attending to both the economic trends as well as the shorter-term technical trends, our IPC presses towards our goal to lower risk in conjunction with our investment objective of achieving a more consistent rate of return over full economic cycles.
If you have specific questions about our strategy or positioning, please let us know and we can dive into the details at our next meeting.