Quarterly Commentary

The Cornerstone Investment Commentary: 1st Quarter 2019

It would be hard to imagine a more perfect reversal of late 2018’s declines than we saw in the gains during the first quarter of 2019.  Overall, global equities are now within about 3% of where they stood six months ago when they hit their all-time highs in late September.

This is not to say, however, that nothing significant has happened since.  At least four things have:  1) The Federal Reserve announced a “pause” in interest rate increases until economic data again suggests one is warranted; 2) Estimates of global economic growth are now noticeably lower than they were last summer (particularly in Europe and the U.S.); 3) Trade tensions have eased somewhat – for now; and 4) Rising inflation pressures are subsiding as wage increases and job growth has cooled somewhat.

All this has several implications for your portfolio.  U.S. stocks should continue to outperform core international holdings, though it will be difficult for either to reach new highs without strong corporate profit growth.  As we suggested last quarter, the Fed’s actions make it likely that interest rates will fall somewhat, a favorable condition for both intermediate-term bonds and real estate.  Finally, holding bonds with inflation protection (TIPs) no longer seems advantageous.

In light of the above, our moves in the last year to further increase your U.S. equity holdings and lower your core international position have paid off; currently, your ratio of U.S.-to-foreign equities is ~3:1.  So, too, has increasing your real estate holdings.  We believe it’s still prudent to maintain a slightly lower overall equity position given these conditions, uncertainties about 2019 corporate growth and recent volatility.   We also believe it would be advantageous to eliminate your small inflation-protected bond position in favor of adding back intermediate-term U.S. Treasuries in your portfolio; thus, we will sell your VTIP holding and replace it with SCHR to accomplish this.

We recently analyzed client portfolios and are pleased to share that the actively-managed funds you hold (those with five letters in their ‘tickers’ not containing the word ‘Index’) have been quite successful overall at besting the benchmarks against which we evaluate them, both recently and over the last 3-5 years.  In addition, the underlying expense ratio of your portfolio’s holdings is now less than 0.25% annually.

Finally, we were notified in January that the Russell Global Index, our best-fit benchmark for your portfolio’s diversified equity allocation, has been ‘de-commissioned’ due to a consolidation amongst the companies which own these indexes.  Fortunately, we were able to replace it with the very similar MSCI All-Country World Index (ACWI).  Like your portfolio, over 50% of both indexes are in U.S. equities, and their respective performance is virtually identical on a year-by-year basis.

With winter ending(!), we hope that your new year is off to a good start and treating you well.  We thank you for the continuing opportunity to work together and send our wishes for a warm and healthy Spring!

Past Commentary