The Dow plummeted 800 points yesterday. Should you turn to Jack Daniels or a yoga mat? Anecdotal information about the economy from your uncle at a party is not reliable. However, a recent semi-annual conference of portfolio managers from Goldman Sachs, Vanguard, JP Morgan, Morningstar and Capital Group is worth your attention. These strategists didn’t always agree on everything, except for:
- We are in an unusual and perhaps unprecedented environment of full employment, strong housing and construction (all historically inflationary events) but with very low inflation and interest rates.
- Changes in government policy (“trade tariffs”) have had and will continue to have a material impact on the markets.
- Interest rates are much more likely to drop than increase and for some time.
- This historic US Bull market rally (now in its 10th year) may have several more quarters (or longer) of upside.
- US markets are significantly more “expensive” than non-US markets.
Many portfolio managers disagreed on US vs. international equities, generally heartburn over Brexit. The challenge for the strategist is to attempt to make significant portfolio allocation changes based on “timing the market.” Often times this can have the opposite effect of worse returns by over-thinking the economic ”tea leaves.”
These professionals suggest having your portfolio comprise both “passive” and “active” elements; “stay the course” with an allocation you’re comfortable with. My financial advisor sums it up nicely, “Experiencing periodic downturns is the emotional price long term investors pay to enjoy long term financial returns. Remember, there has never been a time when market pullbacks have not been followed by a recovery and ultimately new highs.”
As a risk management professional inside or outside of a financial institution, having a broader understanding of the economy can help you help your client. Bulls and bears, what’s your risk?