Stocks were marginally higher this week, remaining at record highs as investors take no-news is good news on the trade front and expectations for steady, subdued growth have become accepted by market participants. Unrest in Hong Kong has finally picked up on investor’s radar, however, particularly as Congress voted to protect human rights and limit certain exports to the globally-important financial center and Chinese territory. Many fear this could easily spillover into the trade negotiations, as China has repeatedly warned Western powers not to interfere with their internal matters. Meanwhile, earnings season is coming to a close, with major retailers reporting this week, and results very mixed from industry to sector. Other data showed support for the expansion, with existing home sales climbing for another month, and US consumer comfort improving for the first time in five weeks. Unsurprisingly, the yield curve flattened this week, as longer-term Treasuries were sought as a flight to safety from the uncertainty surrounding trade and lingering fears of a 2020 recession remain.

One area of global markets that we are keeping a sharp eye on are emerging markets, where we are considering potential opportunities and risks going forward. The past decade has been unkind to developing market investors, as valuations have remained subdued, likely a persisting scar from the Financial Crisis. The valuation gap between the US and these foreign markets is now at record levels, with US stocks trading at high multiples due to perceived safety and quality, while investors shun potential risks overseas from trade wars, political strife, and growth scares. Meanwhile, despite the relative “cheapness” of these markets, growth there still leads the world, with India, China, and other Southeast Asian nations growing several times faster than the US or Europe. In years past, the emerging markets complex has tended to move in tandem, as many countries were tied to the same export-driven fundamentals. That narrative has changed, however, as countries are looking more and more unique in their trajectories, dependent upon political leanings, technological progress, and demographics. We think this “disruption” presents a long-term opportunity to find value through undervalued companies in emerging markets, where active managers can go bargain hunting with current depressed values.

For now, we are maintaining a slight overweight to risk assets, as we believe recession fears were overblown through the summer and fall, and have conviction that 2020 should see a rebound in global economic growth. With central banks continuing to inject liquidity into the financial system through asset purchases, and government policymakers looking to stabilize markets, we think there is reason to remain optimistic that a turnaround is in the making. With that said, we have been very selective in our risk taking, adding mostly to higher quality equities and those that have historically minimized the amount of downside risk. The recent run up has been impressive and based mostly on hopes rather than hard data, so volatility is likely until confirmation of anticipated underlying strength can be found. With that in mind, we think being allocated more to defensive equities such as consumer staples, real estate, dividend payers, and companies with strong earnings and balance sheets is the best exposure for this type of market environment. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.