At the beginning of 2019, we shared our market perspective with you in our piece “Higher Expected Earnings Available at a Lower Price – What Do we See for the Year Ahead?” We entered 2019 with a portfolio that was positioned to benefit from upwards movement in the market, and the results played out well for our investment portfolios – and more importantly, our clients.
Now we write to you amid an increase in global tensions. We have already made an adjustment this morning to reduce risk within our managed models. We have the tactical capability to make these types of reactions, and various factors play a role in this decision each time a situation presents itself.
Before addressing the economics of this situation, we want to express that our thoughts and prayers are with the American service members. Global conflict is an unfortunate reality in our world, and we are here today to do our part in managing your portfolio.
-On the evening of January 2nd (US Eastern time) the US conducted a drone strike against Qassem Soleimani and others traveling with him at the time. Soleimani has been confirmed to be dead.
-Soleimani commanded the QUDS force, which is a subset with the Islamic Revolutionary Guard Corps. He has been a key player in the connection between Iran and many of the militia groups who were informally sponsored by Iran.
Broad Market Indicators
Meanwhile, we have a backdrop of mixed economic data.
Manufacturing Momentum: We see steady growth from the US while there has been a slowdown throughout much of Europe. We continue to monitor monthly data as it’s reported.
Market Valuation: The 1-year forward PE ratio is 18.271. The S&P500 20 year average is 16.12. We are slightly above average valuation.
Interest Rates: The yield curve was briefly inverted during 2019. Now, it has returned towards a normal upward slope. We acknowledge that an inverted yield curve has been an indicator of recession, and we see the return to normal slope as a sign that we may have additional market upside before this cycle comes to an end.
The market (S&P500) is only down roughly 0.5% (since Soleimani strike) at the time of this writing and we have just seen excellent portfolio appreciation over the course of 2019. We’re using this opportunity to moderately lower portfolio risk.
The leader of Iran, Ayatollah Khamenei, will now face pressure to respond to the killing of an Iranian general. From a market standpoint, there will be heightened risk as we anticipate these responses. If the Iranian response targets American lives or interests, then it is rationale to expect further US action.
We realize an Iranian response may take days, weeks, or longer. During this time additional economic data will continue to develop. We’ll be weighing the data and the global tensions, while recognizing that we are late in the stages of a decade-long economic expansion. It’s an expansion that we believe can still go further, but we’re staying prudent.
We write these notes to let you know how we view the world and how we are positioning. We have clients and portfolios across the risk/return spectrum. If you are reading this, and you want to discuss further then just let us know. We can accommodate additional risk reduction or a pivot back towards higher risk – if that is your preference.
Also, feel free to share this note. We have kept this commentary concise in favor of painting the broad economic backdrop overlaid with this short-term, event-driven risk. If you think a family member, friend, or colleague would benefit from this overview then go ahead and share it with them.
1: S&P 500 Data and Yardeni Research
2: Factset, JP Morgan Asset Management