As my wife and I hone-in on 10 years of marriage, I’ve come to learn that there are two things that a married couple will never, ever agree upon:
1) The appropriate ambient temperature inside of their home.
2) The proper way to load a dishwasher. Sidenote: my wife and I can’t even agree upon the proper terminology for this task, as she uses the word ‘stack’ while I use the correct term - ‘load’.
When it comes to home temperature, I’m the type of person with an internal sensor that flashes red warning signs the moment the thermometer display exceeds 67 degrees. Impulsively, I begin shedding layers and opening windows even as my wife continues to press the + button on our thermostat. Oddly enough, with this little bit of give and take, the temperature of our home somehow becomes amenable to the both of us.
This isn’t unlike the unintentional relationship between the Trump administration and the Federal Reserve throughout 2019. The U.S. / China trade war began to cool the global economy down a bit, so the Fed voted to lower the fed funds target rate in an effort to heat the economy back up. I am not insinuating that the Fed acted based on administration policies alone, but it is clear that they were seeing some alarming global data emerge as the trade war continued and, at times, escalated. Destiny Capital’s Investment Committee shared these concerns, particularly over the summer months as the Fed continued its rate cut cycle.
Despite all of this (or because of it), what we have at the end of 2019 and the start of 2020 is unemployment at-or-near record lows, wages on the rise, and financial markets that have rebounded from a very volatile 2018.
That’s not to say that we don’t face both challenges and opportunities in 2020. Destiny Capital’s Investment Committee conducted substantial research over the second half of 2019, and we are seeing some of the following trends & themes emerge as we move into 2020.
Low Yields on Cash & Cash Equivalents
With a short term interest rate target between 1.5%-1.75%, and Core CPI (inflation) at 2.3%, it’s becoming increasingly important that long term investors remain invested in financial markets. Simply put, cash and cash-equivalent interest rates are below inflation, which means that investors are losing money each year by staying in cash.
Corporate Bonds – Know What You Own
The bond market faces some challenges, as well, in a low interest rate environment. Bond returns were remarkable in 2019, but we do not expect this performance to continue into 2020. Destiny Capital’s Investment Committee has also uncovered a trend that, within the corporate bond realm, overall bond quality has declined while duration (interest rate sensitivity) has increased. Therefore, we will be tactically reallocating the corporate bond exposure within client portfolios in early 2020 in order to mitigate these risks.
The Federal Reserve
In 2020, the Federal Open Market Committee will welcome 4 new voting members while 4 existing members step down. These four new members are Cleveland Fed President Loretta Mester, Philadelphia Fed President Patrick Harker, Dallas Fed President Robert Kaplan, and Minneapolis Fed President Neel Kashkari. While Neel Kashkari remains a very vocal proponent of additional rate cuts, we do not expect the Fed to cut rates again in 2020. Rate cuts may only emerge if there is a considerable, negative change in the domestic and global data analyzed by the Fed.
U.S. / China Trade War & the Iran Conflict
As of this writing, we are witnessing an escalation in aggression between Iran and the United States. Each day, news materializes which is causing additional short-term market uncertainty. So far, the market reaction to this news has been somewhat muted. In the past, financial markets reacted sharply to negative news from the Middle East primarily due to potential impacts to both the supply and price of oil. As the United States has become more energy independent in recent years, domestic markets have been able to be a bit less reactionary to daily headlines from the Middle East. Regardless, the direction of this new escalation remains uncertain, so Destiny Capital will monitor this situation closely as it continues to develop.
When it comes to the U.S. / China trade war, it appears as though steps are being taken toward de-escalation. De-escalation would be a very positive development for global markets. While very few details have emerged, the current administration has stated that the U.S. has reached a ‘Phase One’ agreement with China. This situation, however, remains very fluid. We’ve stated time after time that the uncertainty caused by the trade war is the largest risk to both the domestic and global economy. Until significant, actionable steps are taken towards de-escalation, uncertainty still remains which will continue to affect the global economy in both the near term and long term.
Environmental, Social & Governance (ESG) Considerations
Destiny Capital believes that money has meaning to each of our clients. We understand that many clients would like to invest in organizations whose missions align with their core values. In the past, investors were only able to address this on an exclusionary basis by stating, for example, “I don’t want to own any of the big tobacco companies.” Over the past year, Destiny Capital has conducted extensive research into how environmental, social, and corporate governance considerations impact corporate profitability and, subsequently, investment performance. Over the past decade, tremendous progress has been made in the quantity and quality of ESG data made available to research analysts. Simply put, ESG data is now relevant and actionable, but this data is not being utilized by the majority of asset managers. Therefore, we contend that there are opportunities and inefficiencies that can be capitalized upon in order to gain a competitive advantage when screening and selecting investments. We believe that fundamental and quantitative analysis that incorporates effective ESG data can enhance risk-adjusted returns while aligning a client’s financial goals with their closely held values. This makes for a more meaningful and impactful investing experience.
Therefore, in 2020, Destiny Capital is excited to announce that we will be launching our flagship ESG portfolio. While we understand that this type of strategy is not appropriate for all investors, we believe it is our fiduciary duty to incorporate ESG considerations into our research. After all, ESG investing isn’t about changing the world, it’s about understanding how the world is changing.
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