Review & Outlook

As we now begin the third quarter of the year, old September valuations that were barely tagged at the end of the first quarter have finally succumbed to a shift in the Federal Reserve’s view of what it takes to keep its chairman, its independence and its path clear of the White House. The answer is of course that as “keep” is (for now) the new “next fired”, there’s no surprise in the market’s choice to follow a Presidential lead and vault to new highs rather than wax wroth over mothballed memories of a 1970’s-style inflation or 2008-like debt-fueled recession.

Critically, we feel the course ahead will track towards less and less as values trend higher. We expect growth rates will slow despite the Administration’s focus on juicing the 2020 election with higher returns. But with the big guns of tax cuts and regulatory relief fired long ago, these efforts will ultimately prove too-little, too-late – if not work at cross purposes. Yet neither the current trade dust-ups (China, Europe and our North American partners) nor the ominous signs from the bond market mean an economic divot is necessarily in the offing. Truth be told, taking a stroke of slower growth isn’t the worst option. And as if taking their cue, the markets have applauded in confidence that the green shoots of growth abroad together with global monetary expansion and record low interest rates will prove enough to extend the cycle. Bottom line, the conditions for serious, real change have not been met, and though the traps ahead may come more frequently, it’s best to keep swinging.

And it is the reasonableness of an outlook focused more on actual results than on the prediction of an alternative course that appeals to our inner technician’s mind. Though we may believe the markets are in the process of establishing a long-term, extended top, we don’t find conditions so singularly adverse as to warrant decisive action. Rather we’ve maintained our exposure through frequent review and tight adherence to our disciplines. While plenty of reactions and retrenchments of the sort seen in 2018 may lie ahead, we’re also likely to see a number of rallies and even new highs. And unless we’re mistaken, the sum is that we’ll make slow progress until either rising wages cut into margins, or inflation tops the combination of growth and productivity gains. In the meantime, we expect investors will remain sanguine about financial assets and stocks in particular.

As we look ahead, though it’s been good to see our modest Investment Plan forecasts repeatedly bested by strong, favorable experience, we’re afraid this may fade and results run closer to our conservative projections. Much as we don’t relish the prospect of being right as returns run soft and would prefer to make more money by being wrong, it’s not a choice we control. Nevertheless, we’re concerned how narrowed returns might exaggerate the impact of small changes – even monthly cash flows, and ultimately affect your long-term goals. With the summer months a great time for slowing down and renewal, if it’s been a while since we last sat down together, we strongly encourage you to call, and let’s discuss how we’re doing and what we’re about in furtherance of your goals.

James W. Mersereau, CFA, CIC
President

Daniel A. Kane, CFA, CIC
Managing Director