6th August CIO Letter

6 August 2019

Dear Client,


If you had invested in the stock market at the beginning of July, did not watch the news in between and only checked your portfolio at the end of the month, you might have thought that July was very boring for the markets. In terms of return, global markets were largely flat for the month: MSCI All Country World Index (ACWI) was at +0.3% in USD terms, S&P500 cash index at +1.3%. For the year, global markets are still up double digits: MSCI ACWI +14.4%, S&P500 +17%.

But what a ride it has been in between! The month saw four historic highs for the S&P500, peaking on 26 July 2019. Then in the last week, the US stock market started to drop, and fell a total of -3.1% from the peak by the end of the week ending 2 August 2019. This was the worst week of the year for US stocks. Monday brought no reprieve, with the S&P500 falling almost another 3%, or about 6% from the peak. 10-year Treasury yields were down to 1.74% (so bond prices were up), levels not seen since October 2016 (before Trump was elected President).

What made markets breathless was the “Powell-Trump squeeze”. On 31 July 2019, Federal Reserve Chairman Jerome Powell delivered the expected 0.25% rate cut but signalled that an extended easing cycle after the current rate cut was unlikely, causing stock markets to fall. The day after, President Trump tweeted about his intention to slap a 10% tariff on $300 billion in additional Chinese imports, compounding the fears and the sell-off. Thereafter, the US Treasury formally named China a currency manipulator – the first such labelling of a country for decades – sparking fears of a full-blown trade war. 

One could be tempted to make a call on the markets. The market had already been too toppish, there was so much residual risk to the global economy from trade tensions, we should have gotten out earlier and maybe we should do so now? The problem with this statement is that we could have made it at any of the four high points earlier in the month, or at the then-historic high in late June, or at the one before that in May or earlier in the year or in the past year and so on. Yes, there have always been dips in between peaks, some deeper and some shallower, some longer and some shorter. But when a long-term view is taken, we see that the market has always recovered and made new highs.

The first question to consider before doing anything in response to the environment is whether you are likely to make the right call. There are many global macro and multi-asset fund managers who try to read the macro and market data – usually indicators related to growth, inflation, trade, earnings, valuation, sentiment – to establish the prevailing economic regime, which is easier said than done. They then shift asset allocations, say, by buying less equities and more bonds, or overweighting certain countries or sectors and underweighting others, to try to outperform the market. (By the way, such “active” management can often be executed using “passive” instruments like ETFs – so ETF-based strategy does not equal to passive investing! But this is a topic for another day.)

But we know from the track record of active managers that macro investing is not easy. Most active managers do not outperform the market and those who do, cannot do so consistently. Why is this so? To successfully do dynamic or tactical asset allocation and profit from it, you need to get many things correct. The right call has multiple facets to it:

  • You need to get the event or data right, for example, whether the Federal Reserve will cut rates, whether there is higher unemployment or lower unemployment.
  • You need to get the market reaction correct. Prior to the last US Presidential Election, nobody would have thought that a Trump win would cause the stock market to go up, but that is what happened. Sometimes, the market prefers poor economic data because they think that it would lead to policy easing. At other times, poor economic data portends lower earnings by listed companies.
  • You need to predict when the market will react. I have often heard macro and hedge fund managers say that they are convinced that they are correct, for example, that interest rates will go up. They are just too early in being right, it is the market that is wrong. Well, the market is what gives the investor his return and the market can fail to conform to your view for years.
  • You need to correctly estimate the impact of one event versus the next few events. Right now, there are as many reasons for a bull story as there are for a bear story. Amidst the gloom over trade, White House economic adviser, Larry Ludlow, has said, “Many good things can happen in a month.” So can bad or worse things.
  • You need to forecast the magnitude of the response of the market and the impact on your portfolio. How much of your portfolio are you going to bet on you getting all the above correct?

According to a Bloomberg article, Wall Street strategists – the experts who read macro and market data – are extremely confused today. There is a 30% gap between the highest forecast for the year-end S&P500 (3,250) and the lowest (2,500), the largest such gap since 2004. Superior insight is hard to achieve, even for the experts.

The second question is this: what happens if you get the call wrong? The chart below shows that getting the timing wrong can seriously hurt your return, as missing even only a few days of strong returns can drastically impact overall performance.

It is so difficult to correctly predict when the turn downs from the peaks will happen; when the market would bottom out; how steep each up move will be; and how deep each of the dips can be. But there is really no need to undertake such a difficult exercise of trying to get it right to beat the market, when the consequence of getting it wrong can hurt your returns significantly. This is especially because we know the good news that the stock market, while volatile in the short run, goes up in the long run.

So stick to your financial plan – continue to invest regularly and do not panic. If anything, a dip in the market is an opportunity for you to invest any other additional surplus monies you might have sitting idle.You are now able to use SRS funds as well as open joint accounts with your children or spouse for investments with MoneyOwl (we are starting with an offline process). Take the step to make your investment or set up that standing instruction after going through the advice process. Thereafter, let the market work for you, while we monitor the performance, review funds selection and conduct the rebalancing. And anytime you wish to, please contact us to speak to a MoneyOwl adviser about your investments or your larger financial plan. This is the only call that you need to make, whatever happens in the markets.  

Yours sincerely,
Chuin Ting Weber, CFA, CAIA
CEO & CIO, MoneyOwl


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