Risk Off, Risk On – Navigating A More Volatile Market

Much of the uptick in volatility experienced in early 2018 continued into the end of the year and remains a factor in early 2019.  The increase in volatility reflects a shift away from a synchronized global growth view to one that is now navigating a variety of global risk factors.  Reflecting this change in sentiment, selling pressure took center stage at the end of 2018, only to be followed by positive buying strength in the month of January as risk factors lessened, and other data points provided support for the market. 

As we previously discussed in our March 2018 Investment Update, “it is now clear that increased volatility in financial markets is a constant to take into account and balance as a part of our investment considerations.”Against this backdrop of increased volatility, we remain focused on proactive long-term asset management centered on client financial goals and investment objectives

Shifting Market View Powers Pendulum Swings

Looking back at the end of 2018, equity market volatility was significant with the downdraft in the month of December resulting in a (-9%) decline for the S&P 500 Index.  The decline in the month pushed the S&P 500 to a decline of (-14%) in the fourth quarter, and a negative return of (-4%) for calendar 2018 on a total return basis.  The decline at the end of 2018 paved the way for a positive pendulum swing at the beginning of 2019, leading to a strong start for the S&P 500 Index which finished +9% for the month on a total return basis (see Exhibit 1). 


Key Factors Driving Increased Volatility of Markets

At the end of 2018 a confluence of factors including fears on yield curve inversion, concerns about rising interest rates, U.S.-China trade tension, and further weakness in China caused global macro concerns.  At the corporate level, Apple’s downward earnings revision contributed to selling pressure in the final month of the year. 

Although these issues remain, more benign commentary from the Federal Reserve, generally intact earnings results, and sustained, albeit slower, U.S. economic results, provided positive tailwinds as 2019 kicked off.Although January’s market performance provided a reprieve from end-of-year selling pressure, the market appears susceptible to economic and/or geopolitical shocks, which will likely sustain financial market volatility.


Client Alignment and Proactive Asset Allocation Provides Direction in Volatile Markets

Given a constant of higher financial market volatility, we believe that our client alignment and proactive long-term investment approach provides us with an effective process which is key in weathering significant market swings.

As such, we are actively engaged when positive market momentum results in the runup of a security and provides an opportunity to reduce exposure, especially considering valuation relative to our assessed intrinsic value.Conversely, volatility-driven dislocation can provide opportunities to add to portfolios during a market pullback.As our Senior Portfolio Manager, Julie Bryan, CFA, noted recently, “opportunities will arise to buy quality companies at discounted prices for longer-term value.”Our approach keeps us invested as appropriate and focused on risk diversification through strategic asset allocation across equities, fixed income, and cash.

Julio C. Quinteros, Jr.