OUR MARCH RESULTS

Our weighted average return in March was +0.10 %. Since 2015, we have generated a net return of +37.64%.

In terms of investment strategy performance, our weighted average net returns for February were (a) +1.01% for conservative strategies, (b) +0.30% for balanced strategies, and (c) -0.46% for aggressive strategies.

March was another positive month for financial markets. In December, markets sold off strongly on fears that the US Fed would continue to raise rates. The Fed buckled and now markets are pricing in the likelihood of a rate cut rather than a rate hike. Both bonds and stocks continued to gain strength on the back of this sentiment. Last month, the S&P 500 (SPY US) rose +1.81%, the MSCI Emerging Market index (EEM US) gained +1.13%, High Yield US corporate bonds (HYG US) rose +1.29%, Emerging Market bonds (EMB US) gained +1.51% and US investment grade bonds (BND US) returned +1.94%.

How are such returns possible when the International Monetary Fund just lowered its global economic growth forecasts from 3.5% to 3.3% (the third downward revision in six months…)? Are the markets not worried about slowing growth in China, populism in Europe, or Brexit (everyone’s favorite topic…)? The answers are simple yet complicated.

First, the stock market is not the economy. It is a discounting mechanism for future earnings. As such, when things look bleak market tends to overreact, but, at some point, sentiment turns and the market anticipates better returns ahead. Second, the market is very poor at discounting political risk. Whereas political risk has had a tendency of resolving itself in western democracies, there is always the risk that things can fall apart. However, history has shown that betting against western democracies has been a terrible bet. Looking to China, China’s economic growth is unprecedented. There are no comparisons to be made. But even though China’s growth is slowing, they continue to grow on an ever expanding base.

 Another question that we hear from clients is whether there will be a recession due to the inverted yield curve. Actually, this line of questioning usually goes something like this: “Inverted yield curves have always caused recessions, what are you going to do to protect my portfolio?”

We love questions like this because they allow us to provide context on what is actually happening. Markets have an inherent degree of reflexivity, but an inverted yield curve is simply an expression of data and, on its own, cannot ‘cause’ anything. Also, all previous recessions following inverted yield curves happened when curves inverted and there where high real short-term interest rates. Scott Grannis of the Calafia Beach Pundit explains this dynamic as follows:

“High real interest rates are symptomatic of a strong economy, but also a shortage of liquidity. Before 2008, the Fed tightened monetary policy by restricting the supply of bank reserves. This caused the price of reserves to rise as banks competed for the reserves they needed to expand their lending activity. A scarcity of bank reserves caused liquidity conditions to deteriorate, while expensive (to borrow) money weighed heavily on weaker borrowers. Today, it bears repeating that the Fed no longer drains reserves in order to tighten; they simply raise the rate they are willing to pay on bank reserves. Bank reserves remain abundant, with excess reserves totaling about $1.5 trillion. If the economy falls into a recession it won’t be the Fed’s fault.”

Put simply, there is no shortage of capital for companies that want to grow. As long as this dynamic is intact, we will continue to invest in growth. Investors that have sold into the current “yield curve inversion” mania have not fared well, and are not looking at the bigger picture.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!

Pauls

FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.