In the February issue of our monthly flagship publication, we feature:

  • On the Record by Chief Investment Officer Tony Roth, where he talks about the recent bounce in stock markets and what it—as well as the preceding drop—indicates for the positioning of your portfolio, whether it reflects problematic economic fundamentals, and if it signals a coming recession.
  • In Focus by Senior Investment Strategist Meghan Shue explores the subject of volatile markets in greater depth, explaining whether it makes sense to sell when volatility spikes, the likelihood of a sustained bear market, and whether market timing is ever a good idea.
  • Investment positioning, major themes, and asset class positioning updates.

Financial markets have taken us for a wild and volatile ride over the past four months. The S&P 500 fell almost 20% from September to December of 2018 on concerns about politics, the Federal Reserve, and global growth. During that time—as is our modus operandi when the headline noise risks overwhelming all other considerations—we kept our focus on economic fundamentals and maintained the view that the U.S. equity market was not reflecting those fundamentals. Cyclical sectors of the equity market (those more closely tied to the business cycle, such as industrials, consumer discretionary, and technology) were pricing in a recession we did not believe would occur in the near term. Markets looked deeply oversold in late December, and we expected the economy to perform better in 2019 than the market was discounting. We made no dramatic changes to our asset allocation and continued to hold a slight overweight to equities through the panic-driven selling. From December 24 through January 30, 2019, the S&P 500 has returned 15% and is now just 8% off its all-time highs. The market’s U-turn has, in our view, been supported by an alleviation of two of the three major risks: politics and the Fed.

On the political front, the U.S. government has now reopened temporarily, and we see it as unlikely—wall or no wall—that President Trump would allow for another shutdown to occur on February 15. Also related to politics, the U.S. and China are engaged in trade negotiations that seem to be moving in the right direction, though important differences remain. We continue to expect a resolution of trade tensions that avoids a further escalation of tariffs on March 1. While any deal or agreement may fall short on some of the more difficult issues, including intellectual property protections and joint venture requirements for U.S. companies doing business in China, removal of the imminent threat of further tariffs would likely be enough to support the equity market in the short term.

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