U.S. Stocks fell sharply after the arrest of a top Chinese tech executive sparked fears of further trade and geopolitical problems between the U.S. and China. Adding to worries, the decline in oil prices over the last two months has investors fearing that global economic growth is slowing.
The yield on the U.S. 10-year Treasury bond fell to 2.88%
Dealing with risk (uncertainty with regard to future outcomes) is the essential requirement for successful investing. The primary source of challenge lies in understanding and assessing the current environment in regards to where we are in the economic and market cycles and how that relates to being aggressive or defensive with your portfolios.
In order to perform over the long-term, we feel the most important thing we can do is to protect the assets we have first. Being able to capitalize on opportunities that present themselves from time to time is only going to be possible if we first protect the downside.
This year has been difficult because the market started off the year in an optimistic mood about the strength of the economy, the wealth effects of all-time highs in the stock market, and the earnings growth expected from corporate tax cuts enacted at the end of 2017. In the last two months the market has gone from only seeing the positives to now only seeing concerns about the future. This change in sentiment has played out with two 10% corrections this year and flat performance from stocks year to date.
We positioned the portfolios defensively last December due to our belief that the good news was mostly reflected in the strong performance of the market in 2017 and that the economic cycle was in the late stages of expansion. Being defensive means allocating more to bonds and cash, which becomes a drag on performance in times of a rising market, but we never know when the market will decide that the the good times have ended or what will be the catalyst to lead to a decline.
We expect continued volatility for both stocks and bonds until a clearer picture emerges of 4th quarter GDP. It seems we have entered a period in which investors are overreacting to headlines on both the upside and the downside.