December 17, 2018

As a former investment advisor (the key word there is “former”), having worked in the business for over 30 years, I am sometimes asked to give my thoughts on the financial markets.  Take them for what they are worth.     

Many economists believe that we are headed for a slowdown in 2019, and a possible recession in 2020, which is bad news for Trump, but that is another story. We are clearly closer to the end of this economic cycle than the beginning.  We have had economic growth for the past ten years. The Fed has slowed the rate of interest rate increases, but rates will continue to rise.  The tax cut was a one time to boost to the economy.  Stock buybacks were the major beneficiary, giving a boost to the markets, but these have slowed down dramatically. The increase in volatility is probably the thing that makes me the most nervous because it is usually a good sign of trouble ahead. Tariffs are the wild card, but I have not seen any consistent theories as to how they might affect stock prices other than making everyone nervous. Stocks, bonds, and commodities have all moved in lock step this year, which is unusual. Stocks are down 2.8% for the year after being up almost 10% at one point. That is a pretty good correction. 

     So what to do? In my experience, when markets go south, they go south quickly, giving investors little time to react. Usually, the turns are so fast and dramatic that investors become frozen at the wheel. Asset allocation is critical.  Raise cash if you are nervous.  You will sleep better at night, and you will have ample opportunities to get back in.  Sector allocation is also important. Don’t make big sector bets as with technology.  With interest rates rising, short to intermediate maturities are appropriate.  In a rising interest rate environment, look for companies that have the ability to raise interest rates.