This Week in the Market

With Scott McCaghren and Tony LaPorta

Domestic equity markets have remained resilient despite major geopolitical concerns.  The escalating tensions between the U.S. and Iran increased pressure on major indices during the overnight session on Tuesday night.  This pressure was alleviated before the opening bell on Wednesday with most sectors trading to new record levels.  This rally was dubbed the “sigh of relief” rally which could be interpreted in differing manners.  The reality is that the current marketplace cares not about good news versus bad news, but rather injections of liquidity from the Fed.  The concern with this posture is the unknown of market responses when the Fed ceases the monumental liquidity injections in the second half of 2020.  Another potential factor lies within upcoming earnings announcements.  If strong, markets will propel higher while if tepid, markets might respond disappointingly. 

Our view has not changed significantly in regards to overall positioning.  While we are forced to chase returns, we also must keep risk in perspective.  We will conduct a major re-balance by next week in order to fall in line with the previous statement.  We do believe that indices can extend recent gains; however, we also see some major potential headwinds that must be addressed.  Volatility is often found at highs and lows of market trends.  We have seen some significant short-term volatility in recent trading sessions which potentially hints toward the thought of some amount of conservation.  Due to the prolonged contraction in long-term volatility, we will be forced to shed the current hedging strategy.  We will be re-positioning portfolios into more defensive areas that contain higher value. 

I personally would like to make a statement of returns versus risk.  “Making hay while the sun shines” sounds great if one knows exactly how long that “sun” will be shining.  In my opinion, the optimal portfolio is designed looking at two distinct factors: forward expected returns versus associated standard deviation (risk).  This combination will not always produce identical market-related returns but it will also not endure as much market-related drawdown.  The 4th quarter of 2018 is a great example of the drawdown comparison while 2019 is a great example of the market-related return aspect.  The point is this, having a balanced portfolio is designed to achieve goals-not solely chase returns.  I urge all investors to keep in mind the goals laid out for pre/post retirement before concluding that their portfolio is not performing to their expectations. 

As always, we continue to monitor all equity, treasury, commodity and currency conditions in order efficiently deploy capital as well as PROTECT invested assets.

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