Stocks looked set to hold onto modest gains for the week, as a continuation of mostly positive earnings news from corporate American kept equity investors pleased. Technology stocks have surprised to the upside with their ongoing growth stories, though margins have begun to be compressed from rising costs associated with their ever-expanding business empires. Meanwhile, investors continue to digest the Fed’s backing off from their aggressive rate hiking campaign, and what that means for global growth and financial markets. The trade dispute with China received renewed threats this week as well, as the administration signaled that there was a long way to go before the two sides could call a truce. With increased tariffs set to go into place in just a matter of weeks, markets are watching the trade discussions closely for signals in either direction. Finally, the potential for another government shutdown remains an ongoing cloud over markets.
Underlying fundamentals in the US remain exceptionally strong as data continues to reinforce the growth story domestically, while most economies globally face a slowdown. US employment growth continues at a rapid clip, wage growth is steady, inflation remains muted, and corporate profitability is at record highs. As far as the health of US corporations, they remain lean and profitable, though a worrying concern arising from swelling corporate debt amounts is something to keep an eye on. Over the last decade with rock-bottom interest rates, companies borrowed trillions of dollars that will need to be rolled over in a now higher rate environment. The cost of servicing that debt has risen, and companies are beginning to deleverage or face higher costs, weighing on the stability of balance sheets and profits. While we believe companies are well positioned and can likely survive with higher borrowing costs, we’ve increased exposure to companies that have lower outstanding debt levels, higher profitability, and more stable, organic growth sources.
We are currently in the midst of a rebalancing of the portfolios, with the goal of better positioning the models for the current state of the financial markets. Our clients will be receiving notification of many trades within their accounts over the next several weeks as we realign to the target weights. The central theme for now is balance – that is, balancing optimism for equities with expectations of volatility, balancing higher yielding bonds with the potential for significant rate movement, and balancing overall risk levels as we are now likely late-cycle in the current bull market. We maintain a preference for risk assets, however, believing that the current environment will provide better opportunities for active managers with proven track records during volatile times. We have also trimmed the overall risk exposure across the board, upping the quality of the equity portfolios, as well as selectively increasing fixed income positions.