Despite great company profits and an expanding economy, this year has seen so much volatility in the markets and negative returns. Henry Ma, President and CIO of Julex Capital Management, one of the Portfolio Stratgists we utilize for client accounts, wrote this last week regarding this issue…
- Higher interest rates. The Fed Chairman Jerome Powell indicated in his recent speech that Feb will continue hiking interest rates at a measured pace despite the stock market weakness.
- Trade war. The trade tensions with China started to show more negative impacts on corporate earnings. Softer China demand was flagged by many companies in the third quarter earnings season. Chip makers like Micron and Lam Research, being more dependent on exports to China, continue struggling. Worries about lackluster demand for the latest iPhones have weighed heavily on Apple recently. In addition, it is uncertain whether the meeting between Trump and Xi later this month will produce any meaningful results.
- Concerns on economic slowdown next year. Many analysts expect a deceleration in 2019 driven by tariffs, the fading impact of the tax cuts and higher borrowing costs caused by the Federal Reserve.
- Expensive valuations of tech stocks. Tech giants like the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks, which had led the general market higher in last few years, were all traded 20% below their recent peaks. Investors have become more worried about their high valuations as the earnings growth may taper off.
Despite many near-term uncertainties and headwinds, our model continues pointing to “risk on” for November portfolio positioning. Although the market trend weakened and volatility increased as a result of the market selloff, the US economic indicators continued to show a positive economic outlook. The Institute for Supply Management manufacturing index still has a very strong reading at 57.7. The GDP grew at a 3.5% annual pace in the third quarter. The Fed may continue raising interest rates at a gradual pace, but the levels of interest rates are still low compared to historical standard. The corporate earnings continue to be strong. Among S&P 500 companies, 78% beat earnings estimates and 61% reported better sales in the third quarter.
At the beginning of November, based on our momentum measures, we increased the portfolio weights to more defensive sectors and asset classes and reduced weights in the more cyclical and risky sectors.
Our strategies aim to limit losses in a protracted bear market while maximizing the upside participation in the favorable market conditions. We don’t believe we are entering a bear market at this moment. Of course, we will update the model monthly to make portfolio adjustments if needed.