November was a “risk-on” month, with the CNN Fear & Greed Index(1) reaching the “Extreme Greed” level. With the Federal Reserve buying more treasury bills than they ever bought in prior Quantitative Easing (QE) periods(2), a variety of U.S. equity indices did very well last month. The S&P 500 Index(3) returned 3.4% while riskier small company stocks, as measured by the Russell 2000 Index(3), were up 4.0%. The VIX Index(3) (The CBOE Volatility Index® which measures U.S. equity market volatility) posted a low for the year of 11.5 on November 26 as complacency in the market set in.
Given the lack of additional Central Bank stimulus, developed market foreign stocks in the MSCI EAFE Net(4) Index produced a more modest return of +1.1% while Emerging Markets as measured by the MSCI Emerging Markets Net(4), lost -0.1%. Investors also did not appear to be interested in bonds, as The Barclays U.S. Aggregate Total Return Bond Index(5) decreased by -0.1%. Surprisingly, market participants did not bid up the price of high yield issues, a traditional “risk-on” asset, with The Barclays High Yield Index(5) only gaining +0.3%.
Warren Buffet, the “Oracle of Omaha” and legendary investor, once said to be “fearful when others are greedy and greedy when others are fearful.”(6) With that in mind, the most important aspect of client relationships, beyond the investment expertise that we offer, is to ensure when these times arise and risk appetites are high, that we work together to restrain any exuberant investment behaviors. The same is true when risk appetites are low and we need to moderate our fearful investment behaviors (e.g., early 2009).
Consequently, the objective right now is to generate returns ahead of client financial plan targets by taking restrained risk in relation to client general risk preferences (i.e., growth models may look more balanced while still attempting to generate double-digit returns). In consideration of the massive QE mentioned above and trade war uncertainty, along with weakening global growth, CIG transitioned to “a later cycle approach” in portfolios during the last quarterly rebalance in furtherance of that goal. Overall, equity holdings were decreased, quality increased and fixed income increased slightly.
On the other hand, given the substantial QE (which one can wonder its rationale), the growth of the money supply has accelerated at a more rapid pace than last year. According to theory, when money growth is faster than the growth of the economy, the excess money goes into financial assets driving even expensive stocks and bonds higher. In addition, according to DataTrek, U.S. stocks rarely reverse course in a dramatic fashion after a year like 2019, but they also don’t usually do quite as well as the long run averages. The one exception was when the Federal Reserve tightened in 1937 and the S&P 500 Index delivered a -35% return(7).
We continue to weigh the potential risks in the markets and plan for a wide range of scenarios, both positive and negative, with the goal of consistently reevaluating and managing the appropriate level of risk so that clients can achieve their financial plan goals. It means delivering a nuanced, material understanding of diversification, which typically means carefully buying assets that have not appreciated and selling investors’ favorites. Diversification remains our best defense and recently healthcare stocks, a lesser performer in 2019, were increased in the portfolios. This increase in equities highlights our continued flexibility and our devotion to offering a fundamental value proposition to clients who seek long-term out-performance.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
- Market Commentary by Art Cashin, UBS Financial Services, November 13, 2019
- Calculated from data obtained from Yahoo Finance, as of 12/11/19
- MSCI, as 12/11/19
- NEPC, as of 12/11/19
- From DataTrek in Market Commentary by Art Cashin, UBS Financial Services, October 16, 2019
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