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Investment Commentary: December 31, 2019

Imagine it’s 10 years ago and The Ghost of Christmas Yet to Come appeared with a glimpse of the investment world in January, 2020. (Let’s say the Ghost appears as one of the anchors from financial news instead of the Grim Reaper from A Christmas Carol.) The Ghost narrates the future:

“10 years from now, economic growth is lackluster around the globe even with massive money printing by central bank. Interest rates are historically low, so low that some $15 trillion of bonds have a negative interest rate. Investors can’t get enough of yield‐less bonds and are dumping record amounts of stock to buy them.  

“The Fed lowered interest rates three times on worries of recession and an existential threat in the form of trade wars, primarily with China, which is also ramping up its military strength and global influence to challenge American hegemony. Large protests for democracy have gripped Hong Kong. The U.S. and Iranian forces have launched bombs and missiles at each other in the Middle East.

“Oil prices haven’t moved up in a decade, but debts have globally. The national debt is almost double what is was in 2009, to over $22 trillion, increasing about $1 trillion a year. And Donald Trump is president, and he has just been impeached. The Dow continues to make new highs, now at 28,500.”

If anything, the past decade has been a lesson that anything is possible. Rigid economic models and assumptions have proved insufficient, to say the least. The 2010s proved you can have high employment (the best jobs market in at least six decades) and low inflation; exploding debt and low interest rates; break‐ups in long relationships between powerful nations and record stock levels. Identifying causes and effects can be challenging enough, but then there’s the question of timing. When? is often the toughest question of all.

The decade and especially 2019 also gave lessons in the power of sentiment and of central bankers. We have noted from time to time since the financial crisis how investors have been net sellers of stocks even as stocks march higher. Never was this truer than in 2019 when investors exited stocks by the largest amount since at least 1992, despite a banner year for stocks.1 If it is true, as the saying goes, that markets exist to make the greatest number of people wrong most of the time, then perhaps markets have more room to run. It’s not a bulletproof indicator, but sentiment matters.  

After a campaign of higher interest rates since the end of 2015, the Fed reversed course and cut rates in July on fears of recession and possible damage from the Trade War. The Fed followed up with cuts in September and October. It was more proof that the Fed, along with other major central banks like the European Central Bank and the Bank of Japan, remains insistent on doing whatever it takes to prop up the economy and stocks. “You don’t fight the Fed” still rings true. For how long and at what eventual consequences, we don’t know just yet.


Despite the market’s run and price tag, sentiment and low interest still make stocks relatively attractive. When the alternatives include cash at a bank earning zero or bonds yielding little to even negative, stocks with some growth and income offer a fighting chance in achieving real returns and providing financial support in the long term.

Our preference for stocks remains tempered somewhat by the threats of the day, specifically policy ones. The U.S.’s “Phase One” trade deal with China has been welcome news, even if the deal is light on substance and not much more than a cease fire. We anticipate tensions will flare up again during the second phase of talks. The risks of trade war and de‐globalization around the world remain. Those risks are perhaps underappreciated.  

Presidential election years often bring elevated amount of volatility and uncertainty; we expect 2020 will have its fair share of both. Iran has just launched missiles at U.S. forces in Iraq in retaliation for the killing of Iran’s powerful general. It’s too early to guess what happens next or the effect on market returns, if any.  

We remain in a conservative‐to‐balanced and diversified position and are selectively adding to the portfolio, including investments in more “value” areas of the market.  

Notable Trades

The following summarizes new and exited positions during the past quarter in our Core strategies (conservative, asset allocation‐driven and absolute return‐focused portfolios representing a majority of our clientele). Note that not all portfolios participate in every trade idea due to clients’ circumstances, portfolio size, or other factors. Some portfolios are managed primarily, or exclusively, with exchange traded funds.

About the Author

Harlan J. Cadinha
Founder, Chairman and Chief Strategist




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