* There are increasing economic signals showing that we are moving toward the latter stages of the current economic expansion. It is important remember that this phase could last anywhere from 1-3 years or more.
* Of the various economic and financial strategy teams we follow, even the most optimistic ones feel that we will likely have a recession within the next three years.
* The Federal Reserve Bank cut interest rates for the third time this year. Historically this has been supportive to stock prices over the next 12 months, especially if the economy does not deteriorate further.
* The committee made a couple of changes to one of the models we manage, including replacing a large cap growth fund and adding a position in a gold fund to help diversify and manage risk. Historically gold funds have been a good hedge against recessions and economic downturns.
The joint investment committee of Horizon and Impel Wealth Management met on the afternoon of November 4th. We began today's meeting by reviewing the historical performance of the model portfolios overseen by the committee. We are happy to report that all of our models have continued to outpace their risk-adjusted, index-based benchmarks over the last one, three, and five-year periods of time. While we are very pleased with the absolute and relative performance of the models, we are cognizant that there are signs that we are late in the economic cycle. We will continue to be diligent to manage the risks of the models, given the economic and political backdrop.
We reviewed the outlooks of the various economic and financial strategy teams followed by the committee. As usual, there is a diversity of thought process among these teams. However, even the most optimistic and bullish of these teams still expect that we will likely see a recession within the next three years. The most pessimistic feel that a recession could arrive by late 2020. All of this is dependent upon what happens with trade/tariff issues between the United States and China, the potential passage of the U.S., Mexico, Canada Trade Accord, Federal Reserve Bank policy, and political issues including the current impeachment process being undertaken by House Democrats, and more importantly the outcome of the November, 2020 elections, now less than one year away.
As for the Fed, they did what most people expected them to do, and cut interest rates for the third time this year. In their post-meeting press conference and release, they stated that they feel that the economy and interest rate policy is on a good course at the present time, and that we should not expect any additional interest rate cuts unless the economic situation deteriorates further, requiring action. Historically, when The Federal Reserve Bank cuts interest rates three times during a period of slowing growth and then stops, the markets have historically done well over the next 12 months. However, if The Fed has to continue cutting interest rates due to poor economic data and performance, the market tends to deteriorate as it expects an upcoming recession. We will continue to watch which scenario plays out.
We are also cognizant that the economy created more jobs than expected in October, and that there were upward revisions to the prior two months as well. While we are still at a historically low unemployment rate of 3.6%, it is important to remember that unemployment is a lagging economic indicator. Corporate earnings season is in full swing and so far company reports have generally come in higher than expected on both the top and bottom lines. This is good news. Inflation is still tame, and we have now entered a cyclically strong time in the markets. Markets tend to do well later in the fourth quarter going into the new year, as many anticipate a Santa Claus Rally.
From a technical standpoint the market has broken above its July 26th high of 3,027, which it had tried and failed to do in September. By breaking out to new all-time highs, we have now seen that both the 50 day and 200 day moving averages are moving higher in tandem. This is all supportive on a short-term basis.
With the economy being in late cycle phase, the joint investment committee decided to make a change to the Impel Wealth Combo model. This model is a combination of actively managed, institutional share class funds along with index and ETF funds utilized to help manage expenses. We decided to take out a long/short commodity fund and move to a fund that includes both gold bullion and gold mining stocks, that are at a historically low price relative to the S&P. We feel this is a better hedge at this point in the economic cycle. Over the last two recessions, both gold and treasury bonds were two of the asset classes that moved up when stock markets moved down. We feel there is prudence in further diversifying and managing risk at this point in time.
We also replaced a large cap growth fund with one that has historically performed better from both a risk and reward standpoint. It is similar to saying we had a better 1st baseman on the bench than we had in the game, so we decided to change 1st baseman. We will continue to monitor the other model portfolios of the joint investment committee to determine if there are any additional changes warranted as we continue to move forward.
Thank you for continuing to put your trust in the team and the process that monitors these portfolios. We appreciate your confidence.
Sources:
Research comes from the below Investment Strategists and Economists:
Cetera Investment Management, Gene Goldman
First Trust, Brian Wesbury
Blackrock, Richard Turnhill
Charles Schwab, Liz Saunders
JP Morgan Chase, Dr. David Kelly
Nuveen, Bob Doll
Raymond James, Larry Adam & Scott Brown
