The recent increased volatility and sharp declines in the equity markets may be causing you some anxiety and as a result you may have feelings of uncertainty about your investments. I am writing to you today in the hope that I can help satisfy some of your concerns.
You might be wondering what has suddenly changed to cause this increased volatility in the markets and pushed the broad indexes sharply lower. While the precise driving factors will probably never be known for certain, it is very likely that a combination of factors are behind the most recent movements. These factors have been present and recognized by investors for some time, but as is true of many things in life, they weren’t really focused on, until they are suddenly deemed important.
Some of these factors include:
Changes from Growth to Value
The rotation into value oriented investments and away from the growth style by some large money managers. The value style stocks have underperformed over the last 18 months by the widest margin in history, and as frequently happens in the investment markets, these patterns tend to revert eventually. In the near term, value style stocks have begun to outperform their growth peers, indicating a shift in sentiment, and potentially also foreshadowing a slowdown in future economic growth. Because the equity markets are dominated by program trading in indexes and ETF’s a shift like this can create increased volatility in the short term.
Uncertainty
Uncertainty about the path of future rate increases by the Federal Reserve, and their impact on the level of economic growth going forward. Higher rates impact nearly every facet of our economy as we are currently significantly leveraged in this country and increased borrowing costs for businesses and consumers throw cold water on the rate of future growth being priced into current stock valuations. As we approach earnings season, we are already seeing early warnings of slower growth expectations being announced by many companies. Slower earnings growth typically leads to lower valuation levels, and weakness in stock prices. There is also considerable uncertainty surrounding the future level of inflation and its impact on the earnings of cyclical companies, as well as the escalating threat of trade tariffs causing a global slowdown in economic growth.
Investment Strategies
Please remember that short term movements of the broad indexes or individual stocks do not necessarily reflect the changes that might be realized in your individual investment portfolio. As conservative, value investors we have discussed with each client the benefits of employing a diversified portfolio of assets as their accounts were initiated under our guidance. For those clients that came to us with high levels of equity exposure, we have encouraged them to work with us to reduce that risk initially, as well as consistently over time.
In cases where clients came to us with a significant cash allocation, we have been methodically looking for attractive opportunities in both equity and income assets, and therefore it is likely the cash reserve will reduce the volatility experienced in those portfolios during the recent broad market weakness. In fact, we will likely use some cash reserves to acquire some quality equity holdings if they reach valuations that look attractive relative to their long term growth potential.
Lastly, please be comforted by the fact that the assets you have entrusted to us are being invested for your long term benefit in high quality equity and income securities that will undoubtedly weather the current volatility and continue to provide growth and income to your accounts long into the future. As always, if you have specific questions about your accounts, or any of the individual holdings, please don’t hesitate to give us a call or send an email and we will be happy to respond as quickly as possible.
About the Author
Randy has more than 15 years of experience managing financial assets for individuals, retirement plans and businesses. Randy joined YHB | Wealth Advisors in January of 2018 and serves as the Director of Wealth Management. Prior to entering the professional wealth management field, he enjoyed building entrepreneurial business ventures from start-up to eventual sale and providing accounting services for public and private firms.