What a crazy few weeks it has been leading up to the Holiday Season. We witnessed a Presidential campaign and election that defied all norms and expectations and culminated in a (at least to most) shocking upset as Donald Trump won the electoral college. Even more surprising than the result itself was the market reaction…. regardless of your political leanings, NOBODY predicted an immediate 4% rally (and still going as of today) on a Trump win. Whether the election results are causing anxiety or excitement in your house, we think it is important to look at the big picture and not get caught up in emotion.
An appropriate analogy for the US Economy is that of an Aircraft Carrier. Once the captain turns the wheel and the rudder adjusts it takes miles for the turn to actually happen. The same holds true for the economy. Whether we are talking about the Federal Reserve changing interest rates, the Government ramping up an infrastructure spending project or a change in the tax code – all of these take a long time to be felt in the broader economy. The point is that changes to the investment landscape will show up over time and we will make adjustments as they occur. Imagine if the markets had been open while the election results were coming in. Many people would have sold equities as the futures indicated that the market would open down 800+ points. Now that a week has passed the market has recovered those 800 points plus 700 more, in whole a move of about 9%! It takes a LONG TIME to get back 9%. Merrill Lynch released a report after the election that discussed the impact of missing the 10 best days in the market each decade. Since 2010 if an investor had been invested in the market continuously they would have a 95% return. Had they missed the 10 best days that return falls to 34%. Since 1930 the market has returned 10,055%; if you missed the 10 best days of each decade your return falls to 31%!
The bottom line for us is that we have a process that regularly and unemotionally guides our weightings to various asset classes. We adjust weightings to lean away from areas that are showing weakness and toward areas that are showing strength. There is no need for us to guess which direction the market is going next, instead we will react when the trend is apparent. Is our process perfect? Of course not, by definition the moving averages are a trailing indicator, our process will never get us out at the very top or in at the very bottom – but we have found that over time, it has been a solid indicator of market direction.
Portfolios
So what are the moving averages suggesting now?
- We are overweight US Equities, overweight alternatives & underweight fixed income.
- Perhaps the most obvious thing is that interest rates are moving higher. This began to happen by late summer and we have reduced our holdings to bonds along the way. Currently our weightings to fixed income are as low as they ever have been.
- Sector weightings have changed. A year ago at this time we were overweight in consumer staples, utilities & telecom. Over the past couple of months, we have scaled out of those sectors and into financials, energy and industrials. All of these trades were done before the election but certainly have been helped by the markets perception that these industries will be helped by the new administration’s policies.
Thank You!!
During this season we are so incredibly thankful. Thankful to live in a country that despite its imperfections still offers so much opportunity; Thankful to work in an industry that allows us to meaningfully help our clients and their families; and most of all, Thankful for YOU our clients. Your trust & confidence in us is humbling and we will always do our utmost to continually earn your ongoing support.
Have a happy & safe Thanksgiving and Holiday Season!
Brett, Steve & Becky
P.S. After working with us for the past year Aaron has decided to move back to Los Angeles to be closer to family and his home. We thank him for his hard work and wish him success in his future endeavors.
