There is a lot of noise in the markets in recent days. It is important to understand and stick to sound investment fundamentals under such circumstances. The market is currently adjusting to slowing earnings going into 2019, slowing global GDP growth, higher inflation and higher interest rates. You have probably heard me say: “What earnings do, the market does”. Moving from an earnings growth rate of 26.32% in 2018 to what is expected to be a 7% earnings growth rate in 2019 is a big change. We still have positive economic growth but we also have new policies that need to be absorbed into the economy. Additionally, all bull market cycles are killed by the Fed raising rates. The longest economic expansion in US history is coming to an end thanks to the Fed. When the Fed stops talking about raising rates the market will settle down.
Today’s activities in the market represent an adjustment period in the normal course of a business cycle. It is not the end of the world as the talking heads of the media will make it out to be but a process that is actually healthy for the markets to complete so we can move forward. This is the purpose of the rate cycle change; to transition the economy into a moderate pace of growth without too much inflation. In monitoring these matters we have taken steps to protect our client’s portfolios from this increase in market volatility as the economy transitions to a slower pace of growth.
Our portfolios as you know are constructed defensively in mind with a bias to large capitalized dividend paying proven enterprises. We attempt to prepare our client situations for their personal short and long-term investment needs based on cash flow analysis, liquidity needs and long-term investment growth needs necessary to outstrip inflation and taxation. In anticipation of the new market conditions some time ago you probably noticed we recalibrated our asset allocations locking in stock profits, while mitigating capital tax gains and rebalanced our asset allocations to be more defensive. Understanding that timing the markets is impossible to do, we prepare for every investment environment by understanding your needs and the current market conditions. All of us at Covington have solid investment management plans and our processes are very thorough. It is important that you stick to your customized financial plans. The best strategy is the same as it has always been: sticking to your overall asset allocation strategy which uniquely incorporates your needs and the recent market selling does not change it. So, unless there is a dramatic change in your financial picture, stick to your long-term investment goals and stay the course. We live in the greatest, most innovative country in the world and the most technological revolutionary time in the history of the world continues. I look forward to seeing you for our annual investment review meetings.
Wishing you continued success and a very Happy New Year!