February Market Snapshot
Market Outlook Summary
We have initiated a value factor tilt across all major equity asset classes
We favor active management as we believe active outperforms passive in the current market environment
We remain market weighted on international equities and fixed income
Commentary
We believe that the economic expansion is likely to continue this year, and that the drivers of growth are likely to persist for the short to medium term. The following market outlook will describe our rationale behind the investment approach we are taking in our portfolios as well as the drivers behind our decisions regarding client portfolio asset allocation and investment style.
Value over Growth
We continue to believe that a broadly diversified portfolio consisting of a blend of stocks and bonds will serve our clients well over the long term. Given the attenuated market rally, we see the market as overvalued, especially in the growth style of investing. We have made a tactical overweight to value stocks across all major asset classes – large cap, mid cap, and small cap.
As valuations are rich, buying opportunities are rare but we believe there are some reasonably priced equities in the large cap value space. We are making these selections very cautiously and for most companies we are not buyers at current prices. As growth stocks tend to experience greater dips when the market sells off, we are staying away from momentum factor plays in favor of cheap, neglected value opportunities at this point in the cycle.
Active vs. Passive
We execute investment strategies for our client portfolio using actively managed mutual funds. We feel that in the currently overvalued market, there is much more to be lost than gained if and when a correction were to occur. Using our thorough due diligence process, we select managers with a solid track record of outperformance and a successful history of navigating the ups and downs of the market cycle, including bull market runs such as the one at present.
No matter how much the financial media continues to extol the virtues of passive investment strategies executed using ETFS, or exchange traded funds, we remain committed to actively managed mutual funds. We compose skillfully portfolios that are crafted to meet each individual client’s specific needs. We feel that this approach is of benefit to our clients over longer time intervals.
International Outlook
In late 2019, our primary concern regarding international markets was uncertainty over the outcome of trade deals between the US and China. Trade risks still loom, however it seems these tensions have somewhat abated as progress has been made. At present time, the more pressing question we see on the horizon is the issue of what to expect from global central banks over the next six to 12 months. Low inflation and a favorable economic environment would seem to imply a low probability of interest rate hikes, however the future is always uncertain.
International equities are a part of our portfolio asset allocation strategy. In 2020 we have started to implement emerging market equities into our client portfolios at market weighting. In other words, we are not tactically over or underweighting at this time. We anticipate lower US returns over the next ten years and would expect the international markets to follow suit.
Conclusion
As the end of tax season quickly approaches, we encourage our clients – and especially those who own businesses – to be mindful of tax efficiency. The best way to minimize tax impact is through strategic tax planning. Does your tax bill reflect a thoughtfully planned 2019? If you would like to discuss ways to reduce taxes in 2020 please set up a time to speak.
We welcome any thoughts or questions on the concepts discussed here in our market outlook piece. These ideas are general in nature and can never be interpreted as individual financial guidance. If any of the topics discussed here require further clarification, we ask that you please contact us.
