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Investment Commentary: March 31, 2019

After a big selloff in the fourth quarter, stocks have rebounded nicely with double-digit gains. Our moves to lower equity exposure seem early if not altogether wrong-headed. Even with some recent market-friendly news regarding the Federal Reserve, the Mueller investigation, and the U.S.’s trade war with China, we still think higher caution is appropriate and prudent, especially when capital preservation is the primary mission.

Not making more money or enough money is an infraction we commit from time to time. We can live with this most of the time (although there are instances we must flog ourselves when it’s clear we should have known better and invested more aggressively). The kind of sin we aim to avoid is material losses, the kind impacting real life circumstances (including retirement goals or general lifestyle) or otherwise inducing financial decisions later regretted (like bailing out and making those losses permanent). A good investment plan one can stick to yields better results over time than a perfect plan one can’t.

The Fed, Trade, and Brexit

In our January 9, 2019 “Investment Commentary” we held a sanguine view on the Fed, which already had begun to walk back what the market interpreted as a hawkish statement on December 19 that sent the stock market plunging 6.2% over four trading days. The Fed has only since furthered an accommodative, even dovish, stance, even expressing concerns about a deteriorating global economy. The Fed’s forecast at the end of 2018 of having to raise rates twice in 2019 has changed to zero. Much of the market’s strength so far in 2019 has been about a Fed headwind-to-tailwind reversal.

Likewise, news regarding the U.S.’s trade negotiations have been somewhat positive though based mostly on the president’s tweets, rumors, and unnamed sources. Perhaps the improving sentiment is mostly thanks to the absence of fireworks. Latest reports claim a deal could be made in the coming weeks. Both sides need a deal—Trump for his reelection effort and China for its sliding economy—and markets now expect something acceptable will be signed soon. We admit this is the most likely outcome, but we also think that both a collapse in talks or a surprisingly great deal (for the U.S.) are also possible. A collapse could remind the market that the state of trade in the world is not a positive one but a headwind for the global economy.

Other trade issues have intensified lately. The odds of a new NAFTA deal have turned south. Trump’s brief threat to close the Mexican border and halt the $1.2 billion of goods that cross daily is a reminder serious trade threats remain in North America. Meanwhile, Trump presses tariff threats against the European Union which itself is escalating trade concerns with China and dealing with Brexit.

Speaking of Brexit, the U.K. Parliament recently rejected a Brexit deal for the third time, intensifying the crisis there. The U.K. is currently set to leave the European Union on April 12. Whether a “hard Brexit,” indefinite delay, general election, or something else is next is anyone’s guess. But it seems Europe’s troubles are at risk of worsening.

It is also a reminder that, however tenuous things seem in the U.S. today, the U.S. remains a bright spot economically. Our Chief Economist, Victor Canto, pegs U.S. GDP growth going forward at 2.5%, which suggests one shouldn’t give up on stocks just yet, particularly U.S. stocks. A low tax and regulatory regime with low interest rates could continue to prop up stock prices. In a world still flush with cash, there aren’t many deep and safe places to invest with growth. Case in point: There are $12 trillion worth of government bonds globally with a negative yield.1 Yes, negative yield means you pay to lend money. Some corporations are also paid to borrow today.

2020 Election

Soon the 2020 election will enter the market’s calculus along what seems to be a rising debate on the merits of capitalism. Trump’s populism has helped give rise to a new, populist Left that is not shy about promoting “socialism.” Both sides share a skepticism of global trade, an aversion to “big tech” platforms including Google and Amazon, and a view of the world colored by resentment and the assumption that the world is a zero-sum game. But that’s where the similarities end.

Markets will increasingly digest various election scenarios, including a Democratic sweep. The PredictIt election futures market currently signals a 59% probability Trump will not be re-elected. Proposals from Democratic candidates for president so far include Medicare for all; higher income taxes, especially on higher earners; a new wealth tax; and corporate reform where large companies would have to put various stakeholders on more equal footing. With 40% of adults not having the funds to cover a $400 emergency, topics such as inequality and socialism will increasingly move front and center.

Given how markets dipped in 2016 with growing anticipation of a Hillary Clinton election victory, markets could be volatile again as they factor in a Democratic presidential nominee and party far less moderate than Clinton. Or Trump could once again agitate markets with something unexpected (or expected). Suffice it to say there will be much to report in the future regarding politics. And regarding debt. As explained in previous notes, the explosion in global debt, especially among poorer credits, remains the core of our concerns. The debt problem threatens to worsen any future economic or market setbacks.

In the meantime, our Core and Balanced portfolios (representing the vast majority of our clientele) remain relatively conservative with a balance between stocks, bonds, and Treasury bills (and a small amount of gold). The current surge in stocks suggests the stock market may soon test the all-time high set in September last year, either signaling a resuming bull market or just a bear market rally with another downdraft coming. It seems appropriate to listen to the market and resist fighting trends.

1 Jason DeSena Trennert, Strategas Research Partners note, “What’s Priced-In and What’s Not: In Search of Variant Perceptions. 4/5/19. 2 Federal Reserve, “Report on the Economic Well-Being of U.S. Households in 2017.” May, 2018.


Harlan Cadinha founded our firm 40 years ago this month. A long tenure with a clean record is a rare accomplishment in our business or any other. The officers and staff here at Cadinha & Co. are grateful for the opportunities, leadership, and mentorship he has provided over the years. Congratulations, Harlan! (He’s not going anywhere, of course, so we will save the big celebration for the 50 th anniversary.)

We all know none of this would have been possible without our greatest asset: an exceptional clientele. We truly appreciate your years of loyalty and support, and we look forward to serving you in the years ahead.

About the Author

Neil Rose, CFA
President & Chief Investment Officer




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