The Beginning of the End?

By: Matt Garrott

Saying the market hates uncertainty is cliché because uncertainty is the only constant in the market.  Otherwise there would be no risk and returns would be miniscule.  Lately, though, there have been three sources of outsized uncertainty: US/China trade, Brexit, and the Federal Reserve.  October may have been the beginning of the end of these extended episodes of uncertainty, perhaps shifting markets back to normal sources of worry.

After almost two years of tit-for-tat and sometimes tweet-for-tweet sparring over trade, the United States and China may have stumbled upon a framework for resolving the dispute.  Instead of one over-arching deal wrapping everything up, a series of agreements seems to be the way forward.  Previous rumors of progress have fallen victim to a cycle of: announced progress -> markets rise -> no real progress is made -> one side announces increased tariffs on the other -> market sells off.  However, by working in mini-deals perhaps progress can be locked in while the next phase is negotiated.

Brexit has been a supposed disaster from the moment the initial referendum results were announced.  The Remain supporters have promised doom, but it’s been slow to arrive and the economic apocalypse might be cancelled altogether.  Brexit had stalled out earlier in the year, but Boris Johnson has managed to rekindle progress after his election.  His October 31st target date has come and gone, but it looks like it is at least in part due to hopes of averting a no-deal hard Brexit.  Britain and the EU are closer to an agreement than ever.

The Federal Reserve finished its three-cut “midcycle adjustment”.  Comments after the latest meeting imply a shift from taking action to a period of monitoring the market.  The Fed has proclaimed its data dependence before, but the recent rate cuts seemed to be in reaction to issues outside of its dual-mandate of employment and inflation.  The coming pause should give both hawks and doves at the Fed time to digest the outcome of the midcycle adjustment.

How should you play each of these developments?  We suggest you don’t “play” those games with your wealth at all.  A thoughtfully constructed diverse portfolio that is regularly rebalanced wins in the long-run.  That doesn’t mean that we don’t pay attention to global events.  We monitor not only the publicly available news, but also news and investment strategy outlooks from several trusted financial institutions.  More often than not, the takeaway from the “experts” is that nobody knows what will happen in the future and more importantly, no one can predict the market’s reaction, especially to big events.  It is a good reminder that an investment strategy that doesn’t rely on forecasts is preferable to the wealth-eroding trading game.

Fairway Scorecard 10-31-2019