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While markets have hit four new all-time highs over the last 21 months, the movements have been largely sideways and each has been followed by bouts of volatility.
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This behavior is very indicative of late economic cycles
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While there is significant evidence that the manufacturing sector of the economy is slowing, it has not brought the rest of the economy down with it... yet.
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The investment committee is looking at options for reducing and managing risk when we eventually experience a recession, which is inevitable at some point.
The joint investment committee of Horizon and Impel Wealth Management met on the afternoon of October 7th to discuss the economic outlook and any possible adjustments to the model portfolios managed by the committee for the benefit of our mutual clients.
The committee was happy to report that all of our model portfolios have continued to outperform their risk adjusted benchmarks over the most recent one, three and five-year periods. While we are happy with the relative performance of the models, it is important to note that the S&P 500 has reached 4 new highs since January of 2018, 21 months ago. While that may sound impressive, the market has moved up less than 5% during that time period. As we saw in a recent headline from one of the economic strategists that we follow, it seems that the market is "going nowhere in an interesting way". Each of the four market highs were subsequently followed by a period of volatility or downturn that has largely been triggered by political/geo-political issues, uncertainty around trade/tariff issues or uncertainty around the path of central banks, especially the Federal Reserve Bank. While we are encouraged that the market has not broken past it is 200 day moving average on the downside, and has not retested the lows from earlier this spring or summer, we are also cognizant that we have not managed to break above the July 26th high on the S&P 500 of 3,027.
The committee has noted that most of the economic and market strategy teams that are followed by the committee are noting continued late cycle behavior, and more mixed signals and volatility have accompanied this. There is an especially pronounced slowing in the manufacturing sector of the economy. Manufacturing had been particularly strong through the early part of the Trump Administration, but subsequently, this has reversed.
It is important to note that manufacturing is a much smaller percentage today than it was 40 years ago. While there is concern that weakness in manufacturing could start to bleed over to the service side of the economy, we have seen continued strong growth in the job market, record low unemployment, and strong consumer spending and retail sales. While CEOs and small business owners are feeling less confident and are holding back on capital spending, we have not reached a level of recession fears in the immediate future...yet.
We have had 10 recessions since the end of World War II; we will eventually have another one. It is important to be prepared for periods of economic volatility, and the committee is looking at potential adjustments to their model portfolios to help make certain that we are structured appropriately to manage risk and downside volatility. It is also important that when markets break to the upside, we use these periods to create the cash and short-term liquidity that we will need to get us through bouts of downturn or volatility. The goal is to avoid having to sell at low prices when markets are down.
Over the next couple of months, the committee will continue to review additional reports that should give us more clues on the direction of the economy. There is also widespread expectation for the Fed to provide an additional interest rate cut before the end of the year. The committee will continue to monitor these situations and will communicate any changes in portfolio structure with you, our trusted friends and clients, as soon as they are made. Thank you for your continued trust in our models and our process. We look forward to continuing to help you meet your financial and investment goals.
