Q4 2017 Quarterly Outlook

Unfortunately for many families living in the Southeastern United States, the 2017 hurricane season has been one of the most devastating in recent history. The year will set a record for the number of consecutive hurricanes since satellites began tracking storm systems. Weather-tracking technology has come a long way in recent years and has not only helped scientists discover how storm systems are created, but can also provide real-time analysis on changes in weather severity. A new system of satellites launched in May 2017 (CYGNSS) can orbit the Earth at an altitude of 1,000 miles and detect changes in wind speed at the surface of the ocean. As precise as the technology has become, the crux of weather prediction is accurately determining where a storm is headed. Potential storm paths are based on a multitude of mathematical models, but as we know, Mother Nature has the ultimate say. The exercise in totality blends precision with modeled assumptions to best handicap the probabilities of the unknowable.

There are parallels to portfolio management and our ability to devise the optimal allocation given what we know today, and our best assumptions regarding future returns. Our investment team spends significant time reviewing valuations, growth rates, policy measures, and a host of other factors with the goal of positioning a portfolio to maximize return per the intended level of risk. Like predicting sunshine or rain, estimating the forward path of the market is not without uncertainty, i.e., risk. Today, investors are increasingly concerned about the uncertainties, especially as they relate to politics and North Korea. These events (and others) may have limited or no impact to financial markets, or could create additional headwinds in the coming year. Adding complexity to the exercise, financial markets have shown the ability to perform well even in the face of challenging geo-political weather.

Realizing that accepting uncertainty is difficult and is acerbated by the duration of the current market cycle, we acknowledge the temptation to remove risk. Our recommendation is not to rely on what is deemed “market timing” but instead rebalance risk levels and focus on the details that directly impact stock prices, mainly corporate fundamentals. As history has shown, getting out of the way of a bad storm is prudent, but exiting your financial investments at the wrong time can come at a great opportunity cost.

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