Quarterly Update

Apr. 2019

Garrett R. D'Alessandro, Chief Executive Officer | Apr. 2019

From the Desk of Garrett D’Alessandro, CFA, CAIA, AIF®

Economic expansions and bull markets do not die of old age; something causes their demise.

The longest economic expansion in the history of the U.S. will reach 121 months this July, surpassing the prior record referenced in the chart below. The current bull market became the longest in U.S. history last August — 113 months at that point — and remains intact today.

We are often asked when the current bull market and economic expansion will end, since both have been going on for so long. Our response is that economic expansions and bull markets do not die of old age; something causes their demise. Past culprits have included:

  • The Federal Reserve raising interest rates too high too fast
  • Sectors of the economy experiencing high and unsustainable debt leverage — i.e., the consumer or banking sector becoming overburdened with debt
  • Unexpected spikes in significant areas of the economy that cause inflation to flare up
  • Significant and sustained declines in consumer and business confidence
  • Extreme valuations in asset prices, i.e., stock or housing prices becoming too high
  • None of these historically significant factors are currently present to any meaningful extent, and we therefore remain positive on U.S. equities. In fact, the S&P 500 is within just 3.3% of the all-time high reached in September 2018 (as of 3/29/2019).

    It’s important to look not just at the length of an expansion or bull market but also at how much growth has occurred in significant areas of the economy and financial markets during their history. The chart below shows growth in nine key areas during the current and prior two longest expansions. As you can see, growth during this expansion has been lower. This is not necessarily bad news. Lower for longer can be quite positive — and profitable.

    One of the most important determinants of investment returns is asset allocation — how investors divide their capital between stocks, bonds and alternatives. Since we expect generally lower returns from fixed income in the next few years, we think investors need to look beyond bonds to generate attractive returns. However, we also know that bonds provide stability during volatile markets. Therefore, we believe investors should develop more resilient portfolios that encompass these categories:

  • Higher-yielding bonds, mainly high-yield municipals
  • Higher-yielding, dividend-paying stocks
  • New and unique alternative investment strategies with attractive yields
  • Why is a more resilient portfolio better? Investors can weather volatility in the equity portion of their portfolios more readily when their other holdings are resilient and stabilizing. This helps them maintain a long-term commitment to equities, which can be quite beneficial. For example, over the past 146 years, investors had more than a 90% probability of positive outcomes when investing in equities over a 10-year holding period and a 100% probability of positive outcomes over a 20-year holding period. This compares with only a 70% probability when investing in equities for a one-year period.

    The lesson is clear — in today’s volatile markets, strategically allocated, resilient portfolios offer investors the best opportunity for long-term success.


    Economic expansions and bull markets do not die of old age; something causes their demise.

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    Important Disclosures

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

    Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

    Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

    There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

    Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

    Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy, and market risk. Investors in MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).

    There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

    Investments in emerging market bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

    As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.

    Index Definitions

    The Standard & Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

    MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.

    The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. As of June 2007, the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

    The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of September 2002, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

    The Dow Jones Select Dividend Index seeks to represent the top 100 U.S. stocks by dividend yield. The index is derived from the Dow Jones U.S. Index and generally consists of 100 dividend-paying stocks that have five-year non-negative Dividend Growth, five-year Dividend Payout Ratio of 60% or less, and three-month average daily trading volume of at least 200,000 shares.

    The Barclays Aggregate Bond Index is composed of U.S. government, mortgage-backed, asset-backed, and corporate fixed income securities with maturities of one year or more.

    The Barclays High Yield Municipal Index covers the high yield portion of the U.S.-dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

    The Bloomberg Barclays U.S. Corporate High Yield Index is an unmanaged, U.S.-dollar-denominated, nonconvertible, non-investment-grade debt index. The index consists of domestic and corporate bonds rated Ba and below with a minimum outstanding amount of $150 million.

    S&P Leveraged Loan Indexes (S&P LL indexes) are capitalization-weighted syndicated loan indexes based upon market weightings, spreads, and interest payments. The S&P/LSTA Leveraged Loan 100 Index (LL100) dates back to 2002 and is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans, as determined by criteria. Its ticker on Bloomberg is SPBDLLB.

    The Bloomberg Commodity Total Return Index, formerly known as Dow Jones-UBS Commodity Index Total Return (DJUBSTR), is composed of futures contracts and reflects the returns on a fully collateralized investment in the BCOM. This combines the returns of the BCOM with the returns on cash collateral invested in 13-week (three-month) U.S. Treasury Bills.

    Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

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