Viewpoints

“No matter the risks we take, we always consider the end to be too soon, even though in life more than anything else quality should be more important than quantity."


- Alex Honnold, Professional Climber

In the documentary, “Free Solo”, which chronicles Alex Honnold’s climb of El Capitan, in Yosemite National Park, we get a first-hand look at unfathomable risk. If you haven’t watched it yet, please, put it in your Netflix queue for immediate viewing. Describing the documentary as tense is an understatement, as the film provides an awe-inspiring look at the first ever climb of El Capitan without ropes or aid of any sort. Though climbing a 3,000 foot sheer rock, with your bare hands, may seem careless, Honnold spent years assessing the risks and did not embark on the journey lightly. In investing, we must always weigh the balance of risk and opportunity in determining the best path forward. Given that the current economic expansion, ten years long in the U.S., is bound to end sooner rather than later, we believe it is helpful to spell out what data points – positive and negative – we regularly analyze as we consider the best direction forward for client portfolios.

The Positives

  • The jobs market is strong. Initial jobless claims, an indicator which is updated every week and turns negative ahead of every recession, is showing no signs of weakness. The unemployment rate, another regularly updated gauge which marches higher ahead of recessions, continues to show strength and is at its lowest level since 1969.

  • The housing market is healthy and mortgage rates are low. Though home sales slowed last year as mortgage rates spiked, 30-year rates have fallen significantly, and mortgage applications have risen 12% in 2019 [1] Also, of positive note, the financial health of homeowners is strong. Mortgage delinquencies are at multi-decade low levels and the amount of income people are spending on debt payments is also at multi-decade lows.

  • Stock market valuations in the U.S. are right at historically average levels. With the exception of a few sub-sectors in the market, it is hard to find the type of widespread euphoria that typically precedes the end of a bull market.


The Negatives

  • Interest costs are higher than at any point of the current economic cycle. Corporations have built up significant debt loads thanks to easy policy from the Fed and paying down these debts will only get harder in the future.

  • What was a one front trade war, with China, has now taken on multiple fronts with the U.S. threatening Mexico as well. While it appears that a deal has been stuck, raising tariffs on trade with Mexico would have much greater economic effects on U.S. growth and significantly reduce earnings forecasts for the S&P 500.

  • Tech stocks have been responsible for a significant share of U.S. stock market gains over the last decade, with unparalleled growth in companies like Apple, Amazon, Google, and Facebook. With the government opening up anti-trust investigations against each of these companies, and calls for a breakup of the underlying businesses, the negative ripple effects that could occur through the stock market are concerning.

As we consider client portfolio allocations in light of the aforementioned factors, we believe that the economy, even if at a slower pace than last year, will continue to expand. In spite of significant volatility last year, increased tariffs on China, and a prolonged government shutdown to start 2019, economic data has been impressively resilient. That being said, we must always consider what will propel growth going forward.

While the Fed’s willingness to halt rate hikes and take trade uncertainty into account is encouraging, the fact that President Trump continues to push for more tariffs on more countries, through the medium of Twitter nonetheless, is concerning. Also, while regulation is necessary in all aspects of the economy, the increased threat of government disruption in the tech sector, the main driver of earnings growth over the last five years, may weigh on stock returns going forward. Quality is greater than quantity, and it is our view that increasing exposure to high quality holdings, within fixed income and equity allocations, rather than chasing returns is of the utmost importance for investors as we come closer to the end of the economic cycle and volatility potentially increases.


[1] Source: CNBC, June 5, 2019

Investment advisory services offered through Independent Financial Partners, a Registered Investment Adviser

WhartonHill Investment Advisory is not owned or controlled by Independent Financial Partners

The opinions voiced in this material are for general information only and are not intended to provide specific investment advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.