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The Quarter in Review with Jeremy DeGroot

May 10, 2018 / Investment Commentary, Portfolio Updates

Chief investment officer Jeremy DeGroot reviews the first quarter of 2018: Investors should be prepared for volatility to continue. We believe it's better to remain more conservatively positioned right now.


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    Global economic growth still remains solid if not strong. And so we don't really see any major macroeconomic risk looking out six or 12 months; the likelihood of recession is low. Of course, there can always be unexpected economic shocks or geopolitical shocks that might cause a market disruption. But the economic fundamentals and earnings fundamentals still remain pretty solid in our view looking out again say over a 12-month period.


    However, as we look out over five years, which is our tactical investment time horizon, our outlook is not so positive. We see/expect low returns for US stocks and that's because we believe the market is overvalued. Valuations are extended here so expected returns are low. When you look at core bonds, we're still looking at very low yields, starting yields, which leads us to conclude that returns from core bonds are also likely to be quite low over five years. So our balance portfolios are underweight to both of those asset classes. We have found some tactical opportunities in more flexible bond funds and floating rate bond funds.


    You know again a key point is that equities are volatile assets. That's why they call them risky assets. They have the potential to have pretty sharp declines. Historically, those have been temporary declines. But as an investor you have to have the fortitude to maintain your positions through those periods when they go down and it's uncomfortable. So they're a piece of our overall diversified portfolio.


    We finally saw some market volatility in the first quarter when U.S. stocks went down 10 percent. It was the first market correction since early 2016 but the message there I think should be that 10 percent market corrections are quite normal. They are to be expected. Historically they happen about once every two years on average. So what was abnormal, what was not normal, was how smooth and calm the market, the stock market, had been particularly in 2017 when we saw every single month a positive return. That had never happened in stock market history.


    So we're seeing a return of volatility to financial markets, moving them back to a more normal type of environment. And so investors need to be prepared probably for that to continue.


    You know a key element of our investment approach is diversification because there's such a wide range of potential outcomes and we don't believe anyone can consistently predict, certainly over the short term, which scenario will play out, when a bear market may happen, when a recession will happen. There are a lot of people trying to do that. History shows most of them are not successful and the ones that get it right one time typically aren't correct in their next forecast. So we believe in looking across a range of reasonably likely scenarios, building a portfolio that is resilient across a range of outcomes. When we see a compelling opportunity, we will put more chips on and make a stronger bet, if you will, on those assets. But right now, again, we feel that the return opportunities are not so strong that we want to ... We believe it's better to remain more conservatively positioned and then be in a position to take advantage of opportunities when stock market volatility returns, when the market has a more meaningful decline.



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