2018 marked the end of an era for fixed income investors. The combined tailwinds of quantitative easing and an accommodative Fed policy that defined the past decade were replaced by rising rates and increased market volatility. The path forward for fixed income in 2019 is less certain than it has been at any time in recent memory.
During this presentation, Eddy Vataru, lead portfolio manager of the Osterweis Total Return Fund (OSTRX), will share his current economic outlook and provide practical insights into developing an investment grade strategy that is flexible enough to handle today’s new realities. Eddy will explain how to combine duration management, sector allocation, and security selection to respond to a wide range of market conditions as well as the risks that need to be considered. Finally, he will discuss how this type of strategy fits into client accounts.
The fourth quarter of 2018 saw U.S. equities decline materially, with especially steep falls in December. During the fourth quarter the equity market as measured by the S&P 500 generated a total return of -13.5%, bringing full year S&P returns to -4.4%. While disappointing, these results need to be seen in the context of a broader and much more severe downturn in global equity markets.
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.
During the second quarter the equity market as measured by the S&P 500 Index had a total return of 3.4%, bringing the year-to-date total return to 2.6%. Second quarter performance reflects the continued low-inflationary expansion of the U.S. economy and the attendant growth in corporate profits. All else being equal, we would expect these trends to persist. The question, of course, is whether “all else is equal.”
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.
During the first quarter of 2018, the stock market, as measured by the S&P 500 Index, had a total return of minus 0.8%. Despite the roughly flat performance for the quarter, volatility spiked to levels not seen in several years.
2017 was a year characterized by low volatility, a flattening yield curve and narrowing corporate bond spreads. The economy grew modestly and the Federal Reserve (the Fed) began to pull back its monetary accommodation.
During the fourth quarter, the stock market, as measured by the S&P 500 Index (the S&P 500), rose another 6.64%, propelling its full year 2017 total return to 21.83%. This reflects the continued low inflationary economic expansion, rising corporate profits and a very clear pro-business agenda in Washington.
In sum, while there are certainly signs of excessive risk-taking in some areas, we feel that they are not systemic risks such as we saw in 2008. A healthy tailwind to corporate profit growth aided by the recent corporate tax rate cuts means that we will not likely see signs of economic weakness for a few years.
During the third quarter, the economy continued its slow, low inflationary expansion and the equity market continued to gain ground. Real Gross Domestic Product (GDP) expanded by an estimated 2.5%, and inflation hovered around 2.0%.
In a nutshell, we believe that the slow growth, low inflation trajectory will continue a while longer and, as a result, the Fed can maintain a very measured pace unwinding its unprecedented monetary ease.
“It is a Riddle, Wrapped in a Mystery, Inside an Enigma: but Perhaps There is a Key” - Winston Churchill
“Not see the forest for the trees” is an idiom derived from British English that describes someone who is so focused on the minutiae that they miss the larger picture.
During the first quarter of 2017, the stock market (as measured by the S&P 500 Index) enjoyed a 6.07% total return. The gains reflect (1) the steady, persistent, non-inflationary economic recovery that has characterized the post-2008 period and (2) investor enthusiasm for President Trump’s pro-business, pro-growth policies.
Since the election of Donald Trump as our next President and the Republicans’ win of both the House and Senate, much has changed in regards to our economic and investment outlooks.
Investors would have done well in 2016 to heed the words of Heraclitus, paraphrased: “Expect the unexpected.” Brexit and the U.S. election results were two glaring examples of the unexpected becoming reality.
We still believe our economy is likely to remain in a slow growth and low interest rate environment for some time. If rates do indeed get pushed lower by the relentless search for “safe-haven” yields, then other markets, such as high yield bonds, may follow. Since shorter duration, high yield bonds currently offer meaningfully higher yields than Treasuries, a further boost caused by a rally in Treasuries accompanied by flat or even tighter spreads could have a further positive impact on total returns in high yield bonds. Given the possibility for higher market volatility going into the election and beyond, we are keeping our defensive, shorter-duration bias and maintaining ample liquidity. Hopefully we can take advantage of bouts of market weakness to acquire both convertible and high yield bonds at attractive yields.
We are now seven years into both an economic recovery and a bull market. Because the 2008 Great Financial Crisis and the subsequent economic recovery were unlike any other since the Great Depression, it makes sense to look back and see from whence we came and to look forward and try to see whether current trends can be sustained.