The joint investment committee of Horizon and Impel Wealth Management began today's meeting by reviewing the year end performance statistics on our primary investment portfolios. All of our portfolios continued to outperform their asset allocation, index basement benchmarks over the most recent one, three, and five-year periods.
However, we are cognizant that during periods of market volatility and decline, this sometimes provides little in the way of consolation to our clients. Even diversified portfolios experienced a decline in value in the October to December quarter. For clients in our more conservative, income-oriented portfolios, losses were considerably less pronounced. The ability to preserve principal was enhanced due to several risk based adjustments that were made to those models in July/August of this year. These included raising additional cash, replacing mid or small cap positions with lower volatility versions, and adding non-correlated investment assets such as long/short commodity positions to help provide more risk management and diversification tools.
There is an interesting juxtaposition when comparing recent economic news to investment market performance and volatility over the last several months. Much of the consternation has been caused by concerns around the Federal Reserve Bank raising interest rates again, the outcome of the mid-term elections leading to gridlock in Washington DC, and the ongoing trade/tariff negotiations between the United States and China. While these headlines grab the attention of people on a daily basis, they also need to be taken in the context of a still relatively strong, but slowing, US economic backdrop.
As we were reminded when the jobs report came out on Friday, January 4th, the economy is still producing a large number of new jobs. For the fifth month in a row, there are actually more job openings than there are people looking for work, the first time this is happened in the history of these statistics. This bodes well for consumer spending as people who are employed tend to continue to buy things. As I once heard JP Morgan's Chief Global Strategist, Dr. David Kelly say, "I stand in AWE of the US consumer. Not only do they continue to spend money regardless of the economy...they actually think that they need more stuff!!". Consumer spending makes up nearly 70% of the US economy. This should help provide a buffer to the short-term news and noise coming from our ongoing battle with China over trade and the current government shutdown. As the United States and China are the world's two largest economies, they need each other. There is significant incentive on both sides to come to some sort of agreement that would put the markets' mind at ease, hopefully sooner than later.
We are aware that investor sentiment has gone from very bullish to very bearish in a short period of time. We are also aware that this is a contrarian indicator. We also know that individual investors pulled record amounts of money out of the market in early and mid-December as the markets turned down. Historically, when these two things happen in unison, markets, at least in the near-term, are near bottoms, as individual investors are typically awful market timers. This presents opportunities to buy when prices are lower. As Warren Buffet says, "Be fearful when others are greedy AND be greedy when others are fearful". Fear is rampant currently. P/E ratios have gone from being slightly over valued in January 2018 to slightly under valued currently. This, against a backdrop of a still relatively strong US economy with no signs of a 2019 recession gives us reason to be cautiously optimistic going forward in 2019.
Therefore, we are making no further adjustments to our model portfolios at the present time. We believe that the proactive adjustments made by the joint investment committee earlier in 2018 served our clients well. We look to be a voice of reason during times of uncertainty. We will continue to watch and monitor the market and the economy and stand ready to make other adjustments if or when needed. Should you have any questions regarding these notes, please do not hesitate to give us a call. We appreciate your trust and confidence and we look forward to continuing to serve you for many years to come.
