3d Quarter of 2018 Commentary from the Chief Investment Officer
The 3d Quarter of 2018 was a dream ride for the United States stock market, with the S&P 500 gliding smoothly up 7.7% with hardly any hint of the volatility that marked the first two quarters of this year. With very strong economic numbers, record-low unemployment, and a FED that is making good on its promise to raise interest rates in an orderly fashion so as not to derail the economy, investors mostly shook off the lingering news about possible trade wars and uncertainty in negotiations with North Korea.
That doesn’t mean that there weren’t struggles in other places in the markets, however. While the US stock markets were up, foreign stock markets and virtually all sectors in bond markets either went absolutely nowhere, or, in some cases, actually generated negative returns for the quarter. While most investors enjoyed healthy gains, it is clear that the amount of growth in an investor’s portfolio was directly related to the amount of each investor’s exposure to the US stock market.
Looking forward, all of the data suggests that we should enjoy a healthy economy for a bit longer. There is no data whatsoever that suggests the onset of a recession in the very near future, so PARAGON’s transition to Recession Protocol is likely a year or longer from being implemented. We are, however, seeing some early signs of weakness, such as a continually flattening yield curve, and a bit of a slowdown in the home construction markets. It is also very clear that the FED and the current administration’s primary focus is keeping a healthy economy going for the foreseeable future, which, at least for now, is effectively balancing out those early warning signals.
Looking forward, there are a number of factors that are influencing our investment decisions at this time. First – the growth we are seeing here in the United States is not necessarily being mirrored in the developed countries overseas. Secondly, as the FED raises interest rates, making capital more expensive, the dollar is expected to rise in relation to other currencies. This has the effect of creating a “headwind” against investing in foreign stocks. Third, as the current administration’s relatively aggressive trade policy plays out and our trading partners grudgingly renegotiate trade deals, it appears that foreign investors are being spooked more than US investors by the negotiated outcomes – and rightly so. Fourth, in approximately 180 days, Great Britain will actually leave the European Union, and so far, it appears that no one is even remotely prepared for what that really means.
We believe that all of these factors collectively make investments in international holdings a relatively risky proposition, when compared to investing in domestic stocks. From all indications, it would appear that from an American perspective, buying foreign investments with American dollars, the situation isn’t likely to improve any time soon. So, going forward into the foreseeable future, PARAGON portfolios will generally be “domestic only” portfolios. While this may be considered a bold move, and even an anathema to portfolio construction purists, it has been our experience in the past that clients tend to have greater confidence and generally feel more at ease with portfolios that reflect only the ups and downs of events happening at home, versus events that happen throughout the globe.