Apparently spooked by rising interest rates and the potential impact of tariffs on future growth, markets gave up more than 15% since the end of September.
While a downturn like that can seem intimidating (and it’s important to pay close attention to short-term dynamics), we recommend that investors stay committed to long-term objectives and goals.
Here’s how we see the current market conditions, along with opportunities and strategies to consider:
The Return of Volatility
2017 was a period of unusually low market volatility, brought on by years of quantitative easing—which is essentially when central banks conduct large scale asset purchases.
In 2018, risk levels rose to more average levels, and we saw greater volatility in the market. While this shift can be uncomfortable, we believe this is ultimately healthy for markets. We’re continuing to monitor market developments closely, keeping an eye on rising interest rates, tariffs, inflation and Federal Reserve policy as 2019 unfolds. In the meantime, market volatility presents an opportunity to add positions where we see value.
A Pause in Interest Rates Hikes
As expected, the Federal Reserve raised interest rates in December 2018, and the yield curve continues to flatten. A flattening yield curve is when the difference between short-term yields (e.g., the 2-year Treasury) and longer-term yields (e.g., the 10-year Treasury) is becoming smaller. The difference is currently less than 0.2%.
As a result, our Investment Committee is emphasizing fixed income exposure on higher quality securities with relatively short maturity dates, because investors are not being adequately compensated for taking on additional risk in the near term. The slowly rising path of the yield curve remains highly data-dependent on the economy, and the probability of a Federal interest rate “pause” in 2019 is increasing.
With tightening financial conditions meeting the later stages of the economic cycle, we expect to see an even greater difference in returns from corporations with challenged fundaments and those with more durable business models.
This environment typically favors an active approach to portfolio management. An active approach involves a more selective process for choosing individual companies, industries, sectors and asset classes (as opposed to a passive approach, which involves buying a broad market index). Our Investment Committee remains focused on the securities of companies with durable franchises in sectors of the economy that stay resilient through a variety of market conditions. We prefer the more defensive sectors (Staples, Healthcare, Utilities, and Communication Services) vs. cyclical sectors from a relative overweight/underweight perspective. We’ve also viewed recent volatility opportunistically to add to Healthcare and Technology.
Despite market volatility and increasing interest rates, general confidence in the economy remains robust. Both consumer-based indicators and small business optimism surveys sit at all-time highs. With a healthy backdrop in the overall economy, we’re viewing the recent market weakness as an opportunity to buy high quality names.
By Stefan K. Iris, CFA, Chief Investment Officer, Camden National Wealth Management
Stefan K. Iris, CFA, has been a key member of Camden National Wealth Management’s investment team since 2010 and has more than 20 years of investment experience. In his role as Chief Investment Officer, Stefan directs long-term investment strategy for client investment portfolios. He is the senior member of the team managing Camden National Wealth Management’s investment management process, including asset allocation and proprietary and non-proprietary investment strategies. Stefan serves as Portfolio Manager for a select number of individual and institutional clients and is currently Chair of Camden National Wealth Management’s Investment and Stock Committees. He was previously Chair of the Fixed Income and Multi-Fund Committees.
Prior to joining Camden National Wealth Management, Stefan worked in the investment industry in Boston for 18 years for companies including Putnam Investment Management, John Hancock Investments and Acadian Asset Management. Stefan holds the Chartered Financial Analyst designation, an MBA from the Sawyer School of Management at Suffolk University, and a Finance degree from Northeastern University. He is a member of the Maine CFA Society and the Boston Security Analysts Society. Stefan and his family reside in North Yarmouth, Maine.
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