Quarterly Investment Outlook: March 2019


• The December 2018 selloff provided buying opportunities in stocks relative to bonds, and cyclicals (energy, basic materials, technology, and industrial sectors) relative to defensives (utilities, consumer staples, and healthcare sectors). The last time that a selloff of this magnitude occurred was at the beginning 2016, a period that warrants further examination due to the many historic parallels that can be drawn between then and now.

• The selloff was dramatic in volume. The ensuing rally has been strong and broadly-based. However the average active manager did not re-enter the market and has excessive holdings of cash.

• Leading economic indicators that we track signal a continuing domestic economic expansion. Given that ninety-five percent of bear markets occur during a recession, we have a high degree of confidence in forecasting the continuation of the current bull market over the next twelve months.

• Technical and fundamental analysis, however, indicates that we are in the late stages of both the investment and business cycles. Historic trends support overweight positions in stocks and commodities and underweight positions in fixed income securities.

• The Federal Reserve has changed their outlook for the future level of the Fed Funds rate and their balance sheet runoff. The dramatic scaling back of expectations for Quantitative Tightening supports our thesis that the Fed will be forced to monetize the federal debt. Past episodes of debt monetization have resulted in an periods of higher inflation.

• The airline industry has undergone a significant consolidation that has provided the big four with immense pricing power. We initiated a position in Delta Air Lines, Inc. (DAL) to take advantage of this trend.

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