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The Fed Acted, the Market Reacted

| December 20, 2018

It’s been awhile since we’ve written – largely because we have been trying to patiently observe and see where these volatile markets are taking us. To be sure, these past few weeks have not been easy for investors, with many commentators noting that 2018 is wrapping up as the worst year in the markets in a decade. Even the most conservative investors have had tough time treading water, with Treasury bills shaping up to be the best asset class for the year – with no major asset class providing positive returns year-to-date as of the end of last week.

In the midst of your busyness making final preparations for the holidays, we wanted to send an update, while also keeping it relatively brief. We are going to focus on the news coming out of the FED yesterday, and then take a quick look at some key principles that we think are important to keep at the forefront in the midst of such turbulent markets.

Yesterday, the FED has “committed” to two more rate hikes in 2019, along with continuing its balance sheet reductions of $50B (yes, billion) per month. We have been struggling all year as to why financial stocks have performed so poorly into an environment that should be conducive to outperformance. We now believe that the FED balance sheet reductions (Quantitative Tightening) is likely the cause of the financials underperformance, as well as a large portion of the broader market pullback as well. Unless we see that change, we are likely to be in this condition for a while.

We’ve discussed in the past that the world is undertaking a financial experiment that has never been tried before. This includes negative interest rates and sovereign countries investing in their own (and other countries’) bond and stock markets. In some cases, it even means owning up to 100% of those respective markets (in the case of Japan’s bond market). It does seem odd (and potentially unethical) to print money only to buy other countries stock (e.g., Switzerland).  (Although if I could print money, I might do the same thing)

So, as we unwind the debt and money printing financial manipulation, we are bound to have some MAJOR dislocations in markets, and to the extent that central banks continue to unwind (and not backdown) it is likely to cause unforeseen ripples in the financial system. We believe the market is wrestling right now with just how disruptive this “Quantitative Tightening” program will be, and certainly did not like FED Chair Jay Powell’s comment that the program is on “autopilot.”

As always, our model is working to reduce the impact of these ripples on your financial future.  In the past couple weeks, we have raised around 15% cash and moved a couple equity positions to more conservative equity. Our international equity positions, as well as fixed income, are helping to reduce volatility as well.

Finally, to have a little fun, a good friend of ours, Carl Richards, wrote an investing book called ‘The Behavior Gap.’  In addition to some really good tidbits of advice, he is most known for his illustrations of complex financial topics on the back of a napkin.  I want to share a couple with you today. Let’s start with this one…

This is great, because there are so many things we focus on that we have no control over (and yes, the market is one of those things we don’t have control over).

In light of the volatility of late, this one seemed particularly relevant.

This last one seems so obvious, but people do it all the time.

As always, we would like to share our gratitude and our sheer enjoyment of helping make a meaningful difference in your lives. Merry Christmas to all!