As our clients know, our strategy has always been—if I had to boil it down to a few sentences—that while keeping the broad asset allocation static to control risk, we tactically adjust the portfolio as opportunities arise within the broad asset classes. We find these opportunities based on relative valuations, meaning that when one area of the global stock market under-performs for a lengthy period, it is often undervalued relative to historic norms, and therefore we can move money there to take advantage of lower prices.

This simple strategy is not difficult to understand; it’s based on the simplest axiom in finance: “buy low, sell high.” However, easy to understand and easy to execute are two very different things. It requires a great deal of discipline to stick to your guns even when the trend is temporarily turning against you.

Most clients will be aware that we have held a  larger-than-normal allocation to emerging markets over the past few years. The reason for this is outlined above—their relative valuation to the US is favorable; in other words, we can buy much more in projected earnings for the same dollar as compared to the US.

From March of 2016 thru March of 2018 this strategy paid off handsomely, as emerging market stocks outpaced our domestic markets. However, in the last six months a trend has developed in the other direction. While the US stock market (S&P 500) has returned a respectable 7% so far, the iShares MSCI Emerging Markets ETF is down about 10% over the same period. Historically-speaking, it is a very rare occurrence to see such a massive divergence as this. In fact, a JP Morgan strategist recently went so far as to call it “unprecedented in history.”

US stocks (represented by the S&P 500 index ETF) versus Emerging Markets (MSCI Emerging Markets ETF) over the last six months. Dividends not reinvested.

Of course, there are several reasons for these recent developments, but the most important seems to be uncertainty around global trade. Indeed, as I write this, news has emerged of a impending US deal with Mexico over NAFTA, and markets all over the world are bouncing upward. Certainly, the threat of a trade war has been weighing on markets and driving the dollar higher; however, we do not believe the underlying economic fundamentals have significantly changed, nor that an ever-escalating, uncontrollable trade war is the most likely scenario.

In times like these, we believe that it’s helpful to remind ourselves of one of our fundamental investment pillars—that assets that are undervalued typically move back to fair value over time (and vice versa.) If this historic market truism continues to work as it did in the past, we will be rewarded in time for our patience and discipline. At the same time, if new data emerges that concretely changes our view of the world, we stand ready to adapt as needed. As the economist, Dr. Paul Samuelson, once quipped,

Well when events change, I change my mind. What do you do?

We stand ready to do the same. Until then, we continue to appreciate the confidence and trust of our clients.


Jon Houk, CFP

The opinions expressed are as of August 2018 and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities. No graph or chart by itself can be used to determine which securities to buy or sell or when to buy or sell them. As with any investments, past performance is not a guarantee of future results. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.