This is part of an ongoing series of articles published by Johnson Financial Group. This issue is written by Brian Schaefer, AVP, Wealth Portfolio Manager and Fixed Income Analyst.
This year I decided to spend Thanksgiving week on vacation in Scottsdale, AZ. The weather was great, but while the annual feast marks the beginning of the holiday season, I found it harder to get into the holiday spirit without a chill in the air. Arizona residents do their best to string lights on cacti and wrap bows around palm trees, but something about a herd of javelinas pulling a suntanned Santa in his sleigh just doesn't feel right.
So, to get that special feeling while 1,800 miles from home, I resorted to watching a Hallmark Holiday movie (or two). If you aren't familiar with the genre, Hallmark Holiday movies are famous for their clichéd storytelling, so much so that “Hallmark Christmas Bingo” has become a favorite party game. If, like me, the movie you watch contains common clichés like romantic ice‐skating, mistletoe, snowball fights, or an evil business attempting to squash a mom and pop sweater‐making operation, you'll be yelling “BINGO!” halfway through the story.
An unintended consequence of watching cliché‐laden Hallmark Holiday movies is that they may make you more sensitive to the clichés that tend to pop up among investors in November and December. A couple of my favorites are the “Santa‐Claus Rally” (a late December/early January surge that buoys stock prices from Christmas through the New Year) and the admonition to “Never Catch a Falling Knife” (trying to time the bottom of a market by buying a security in a steep downtrend). The latter advice may seem sage to anyone who attempted buying the dip in oil in early October, only to feel the pain of a steeper swoon in November.
Another old saw among investors is the saying “Don't Fight the Fed.” In recent years, the saying was used to argue that the Federal Reserve's campaign to keep interest rates low would support risk assets like stocks. Today, it is more likely to be used to warn that higher rates via Fed rate increases may make it more expensive for companies to borrow, which could reduce profits and result in poor stock performance.
Clichés like these may offer Hallmark‐like comfort to investors, but they are no substitute for the real research that the advisors at Johnson Financial Group conduct every day to make informed decisions about allocating our clients' capital. Instead of offering hackneyed observations about oil's decline, we try to see through the headlines to understand that a drop in oil prices is good for U.S. consumer spending and supportive of stronger retail sales, even as it poses challenges to domestic oil exports. (The U.S. is now the world's largest crude oil producer.)
We have also reminded our clients that while the Federal Reserve is not as accommodating as it has been in recent years after raising short rates eight times since late 2015 (with another increase likely in December), we may be closer to the end of this hiking cycle than some market participants believe. Recent market volatility and softer economic data such as declining homebuilder sentiment, along with a flatter yield curve (a narrowing of the gap between long and short‐term interest rates), are likely to put a crimp in the Fed's plans to raise rates three more times in 2019. As we have seen in recent weeks, such economic hiccups could translate into lower U.S. Treasury bond yields (and higher prices). Since our investment process is based on research instead of comforting clichés, we have favored high‐quality, intermediate‐term bonds over more richly valued high‐yield bonds in 2018. High‐quality bonds continue to provide support during market stress and now yield well more than the S&P 500's sub‐2% dividend.
If this were a Hallmark movie, we would end this week's commentary with some cocoa‐flavored clichés suggesting that we can see Santa on our radar, already preparing to deliver investors some late December profits. Alas, just as I flew home to the reality of 28 degrees and the possibility of a snowstorm, the reality of investing is that markets are often fickle and even irrational. Forecasts for slower (but still positive) earnings growth in 2019 have thus caused a swift reversal in previously highflying tech companies, with the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) recently entering so called “bear‐market territory.” At the same time, stodgy consumer staples and treasury bonds have benefited from a flight to safety. Perhaps our most important role as advisors is to remain skeptical when markets are frothy and calm when they are stormy. When we play this role properly, emphasizing research over emotion, we deliver the consistency that leads to investment success in ways no cliché ever could.
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