Recently, we held our first “Town Hall” event where folks had the opportunity to ask questions about current market conditions and recent geopolitical events. In light of recent market declines, the return of volatility, talks of trade tariffs, Federal Reserve and inflation concerns— we thought that having an opportunity for an open and straight forward discussion between clients and friends was not a bad idea. Even though these topics are multi layered and complex and, dare we say boring, we did our very best to keep it entertaining. We were somewhere between a reputable business publication and a game show. The turnout was great, and, more importantly, some very thoughtful questions were asked. It was fun for us as well, and it was not the last time for us to do an event like this.
After some opening remarks, we began with the idea that investing is about more than just risk and return—it is about understanding what you, the investor, are trying to accomplish…your objectives, if you will. With clear objectives, a plan can be developed to reach those objectives. One part of that plan is determining how the assets should be invested, which includes a consideration of your tolerance for risk and need for return. There is no “one” right way to invest, since investing is ultimately a deeply personal journey. But having a skilled advisory team to take that journey with you is typically a good thing. And at Stone Bridge, our investment process combines a global portfolio of diverse assets with the use of our “financial risk” indicator to actively manage our clients’ exposure to stock market risk. In spite of the recent downtown in stocks, our indicator has so far kept us in our core allocations.
As we opened the floor to questions, the first one was simply, “What caused the recent market correction?” We summed it up this way: on January 26th the markets hit all-time highs on the back of continued positive global growth and controlled inflation. Markets were then surprised by a jump in domestic wage growth, sparking concerns that inflation might surprise markets as well. The back-story is that unemployment has finally come back down to normal levels, and it continues to move lower. As fewer people are looking for jobs, employers are forced to raise wages, which ultimately creates inflation pressures. This is not a bad thing, because it means the economy is growing, people have jobs, and their standard of living is rising! This is what the Fed has been waiting for. The bond market responded, as one would expect, with higher rates in order to compensate for the effect of potentially higher inflation. And the Fed itself has already said it intends to raise rates this year and next in sync with its inflation projections, so this just confirms what it has been saying.
Getting back to the current correction, the market responded to the surprise in wage growth with fear that rate hikes by the Fed might come even quicker than previously expected, and as stocks and bonds began to pull back, stock market volatility jumped from very low levels. Now add to that the President’s “tweets” of tariffs against our major trading partners—tweets that threaten the global growth story about which we have recently reported—and you have the recipe for a market correction. While we expect interest rates and geopolitical risk (such as tariffs and other threats to trade and global productivity) to continue to dominate the market cycle for the foreseeable future, we don’t see any sign of recession in the near term.
One participant asked for our opinion on “crypto currencies”, like Bitcoin. Crypto currencies are still a bit of a mystery to us. We believe the jury is still out on whether they can fulfill their role as a currency. One such role is to be a store of value, which suggests some stability in price or value. Crypto currencies have recently experienced wild swings in valuation and even claims of fraud. We believe that both of these things mean government regulations are coming soon for the crypto world. Another role is to act as a means of payment, which is still very limited. We are definitely taking a wait and see approach on “crypto currencies” but recognize that the technology behind them is likely to find a purpose, whether currency related or not.
We certainly covered a lot in our first “Town Hall” event with many smart questions by our clients and friends. Hopefully, we provided a little clarity into, or at least some educated guesses about current market conditions. More importantly, we highlighted the importance of having a plan and a process around one’s investment goals. See you at the next event!