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August Newsletter – Offence sells tickets. Defence wins Championships

This is a quote from Bear Bryant, the US College Football coach with the most wins ever: 323 in all including 6 national championships and 13 divisional championships over his 25-year career. We certainly subscribe to this school of thought and as such believe the time has come to review asset allocation overall. 

Recently, we have seen global equity markets reach all time highs. Granted, though there was a brief pullback August 5th due to the Chinese supporting the fall of their currency, we haven’t seen a major correction for quite some time. As much as the equity markets have been very good year to date, it is our view at this point that there is more downside risk than upside potential between now and year end. Our reasons for this are many and varied but the key theme here is earnings growth. Earnings are the key determinant in evaluating stock prices and as earnings growth slows, so too does the potential for increases in stock prices. Already this year we have seen meaningful decreases in earnings growth which is a cause for concern. Some of the other factors in our decision making are as follows. 

  1. Recent inversion of the yield curve in the US.
  2. A decline in the Purchasing Managers Index (PMI) toward the critical level of 50.
  3. The Federal Reserve in the US dropping interest rates in view of a weakening economy. 

I won’t bore you with detail of the above but if you would like to call and discuss or learn more about each, I would be happy to chat. 

So What Does This Mean?

While each of us has our own asset allocation, set appropriately for our own risk tolerance, we are in general going to reduce equity exposure and add to fixed income between now and the end of the year. Specifically, we intend to reduce our overweight position in both US and International equities to add to fixed income in the way of Notes and Fixed Income Funds both investment grade and high yield. Again, allocations will be unique to everyone based on risk tolerance. We believe at this time, locking in some equity gains and becoming a bit more conservative is prudent. It’s important to note here that we are not exiting equities entirely, even in a downturn there are good reasons to hold equity, this is just a reduction in exposure. 

Again, if you would like to talk about our logic here or have questions about your own asset mix/risk tolerance, give us a call, we are here to help.