2019 was a very good year for investors. Surprisingly, both offensive and defensive sectors did well, which is a marked about-face compared with 2018. We believe this is mostly due to a central bank shift to policy easing, especially in the U.S., coupled with a relatively steady economy.
Looking at the beginning and ending levels for equities and fixed income during the third quarter, one might erroneously conclude that it was another summer snoozefest. However, there was volatility during the quarter as the equity markets shrugged off a sloppy August awash in second quarter earnings disappointments and staged a solid comeback rally through September.
The financial press is replete with stories about what possible calamity awaits if the Federal Reserve (the Fed) does not cut the fed funds rate soon. Services that track the odds of a cut (at this writing) are calling with near certainty for one in July.
Last year’s fourth quarter selloff was largely triggered by fears that the Federal Reserve (the “Fed”) had overshot the mark with its December rate hike, and that elevated borrowing rates would cause a recession. The Fed’s subsequent pivot back to accommodation and calming suasion was very well-received by investors in the first quarter, as risk assets such as equities and high yield bonds snapped back nicely.
The markets have not been kind to investors lately. There were precious few bright spots in the recent quarter, and it seems there was nowhere to hide, except cash. Our instincts, however, tell us that cash is not a long-term solution.
The past quarter has had its fair share of market moving events, including another Federal Reserve (Fed) hike, a flattening yield curve, geo-political events and potential tariff wars. As we wrote last quarter, separating the signal from the noise remains challenging, but we feel it is the key to keeping perspective.
Written in 1606, Shakespeare’s words are just as relevant today. Tweets and eye-catching headlines dominate the news cycle and many conversations, but when you parse them for impactful content, you realize it’s mostly just white noise.
“It is a Riddle, Wrapped in a Mystery, Inside an Enigma: but Perhaps There is a Key” - Winston Churchill