Quarterly Commentary

Market Update

January 23, 2019

During the final weeks of 2018, the intraday volatility of the US stock market indexes was unprecedented (click here to view graph). This is not totally surprising, due to the constant barrage of political, trade, economic and Federal Reserve news. We anticipated lots of “noise”, but felt confident that as fourth quarter 2018 corporate earnings reports came out over the early weeks and months of this year (2019), that the US stock markets would stabilize. Good corporate earnings determine the pulse of the broad stock markets. All indications have been that these reports will be solid. Of course, there will be exceptions, and many companies as they report could be cautious in their future outlook due to so many mixed signals about US economic trends. For example, the recent new jobs statistics were surprisingly strong, but housing related statistics have clearly been weaker. Yes, 2018 ended the year with single digit losses, but at current price to earnings valuations (PE) the stock market is not expensive in historical terms.

These are the important facts to be mindful of: China’s economic growth, after decades of low double-digit growth, is decelerating. Their lower economic growth is still higher than the rest of the world, but their economy is older now and shifted from one driven by manufacturing, which has higher margins, to a consumer driven economy (service) where margins are lower. There is not a risk of global recession with a slower Chinese GDP now likely in the 6% range and US GDP growth in the 1-3% range. The US Federal Reserve has strongly messaged that their “tightening” stance will now be more measured and they will be more flexible in order to prevent a US recession. In this environment, there is likely not a risk to investors similar to the 2008 global recession.

We continue to feel that stocks, managed in a strategically diversified portfolio, are attractive investment alternatives. In our view, with a bull market run that has lasted almost nine and a half years, the longest US bull market in history, risk assessment of your entire asset base is very important. As you know, we are always cognizant of risk control. There are two primary ways that we reduce volatility and manage risk in stock portfolios. Most critical is having exposure to both growth stocks and value stocks. There is a long history of value and growth performing inversely very consistently and you cannot time the shifts between those two styles, value and growth. Each has a history of being the market leader. Certainly over these past years the market has been pushed by the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google). They are classic growth stocks with high valuations.

In this recent cycle, technology stocks have had the highest valuations. The technology stocks that we have bought for you have performed very well, but our discipline of sector diversification has prevented us from investing 26% in technology stocks, which is what the broad market average weightings got up to at their peak last year.

On the topic of risk control in your portfolios, I think you all know that there is no other more critical decision than your overall asset allocation: your mix between stocks and bonds and cash as well as real estate and even alternatives. Your asset allocation should not shift in reaction to market fears, news, or noise. That is a terrible mistake. It should be a long-term strategy. Only review and discuss a shift if your life circumstances have changed. Divorce, retirement, and higher living expenses are examples of such shifts.

We advise many of our clients to have a balanced objective, 60% stocks and 40% bonds. This is for one primary reason: it has reduced clients’ inclinations to “time” the market (always a huge mistake). Market timing usually ends up being “selling at the bottom” and “buying at the top”!

The hedge effect of putting stocks and bonds together continues. 2018 was no exception. Our strategy of buying individual, high quality bonds with a managed duration gives us a great deal of control over managing bond risk. I do contend that in the market and economic cycle going forward, some investors that selected 100% equities as their allocation may be better served in a long-term balanced mix. Sorry, but your age could now be a factor here. There are many very long-term situations (10+ year time horizon and even most IRAs) that still argue for 100% equities.

Please make a point to attend one of our market updates if you are able. There you will hear more about your holdings and strategic shifts. The market update schedule can be found at here.

Finally, enclosed please see our quarterly non-profit spotlight featuring Coffee Memorial Blood Center.


Jeanie Wyatt, CFA
Chief Executive Officer & Chief Investment Officer



This letter is not intended to constitute investment advice. Market and economic views are subject to change without notice and may be untimely when presented here. You are advised not to infer or assume that any securities, sectors, or markets described in this letter were or will be profitable. Securities identified in this letter do not represent all of the securities purchased, sold, or recommended for advisory clients, and you should not assume that the recommendations made in the future will be profitable or will equal the performance of the securities identified above. A complete list of all equity recommendations made by STMM during the past year is available upon request. Past performance is not indicative of future results. There is a risk of loss.

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