Here are a few observations that may help to dampen down the short-term noise

Dec 2018
Julianna Donovan

Wishing you and yours the best of health, happiness and prosperity for the Holidays and every day.  It feels like the world is stumbling over the finish line for 2018, but 2019 awaits and we look forward with enthusiasm, spirit and optimism – but not blind to the challenges and uncertainty that abounds.  So, in addition to our good wishes, here are a few observations that may help to dampen down the short-term noise and amplify the long-term view.


US economic growth is likely slowing from ~3% to 2%+ as fiscal stimulus (tax reform) fades.  However, an imminent recession does not seem likely.

Market volatility has clearly picked up, but take a look at a 10y chart on the S&P 500 Index for some perspective.  Also note the LACK of “normal volatility” until very recently.

Stock market earnings, in aggregate, are expected to grow ~9% in 2019, following a 20%+ increase in 2018.  Earnings growth is slowing, but not collapsing.

Market valuation at 14X 2019 estimated earnings is not excessive and areas of irrational exuberance (i.e. bubbles) are the exception, not the rule.


In a nutshell….uncertainty.  We are at a pivot point in central bank policy.  As interest rates rise and the yield curve flattens, equity investors are “taking chips off the table” and reallocating to fixed income, an asset class that now has an actual real yield that appeals.  Actions by the Federal Reserve to raise rates to 2.75% while targeting 3.25% would be considered “normal” at this point in most prior cycles.  The U.S. Treasury’s $4.5 Trillion balance sheet looms large and is something that markets are watching closely.


  • Define cash needs and plan accordingly by holding 12-18 months of your needs in money markets / short-term bonds knowing that a meaningful flow of dividends and interest will help to re-fill the coffers.
  • Recognize that equities do not typically go up in a straight line.  Volatility is normal and should be viewed in the context of a long-term time horizon and opportunity.
  • Hold bonds for capital preservation.
  • Focus on long-term goals and plan accordingly.  Live your life and do not get distracted by market choppiness and media noise.



  • Trimming large positions – taking capital gains – and offsetting them where possible.
  • Taking “sector risk” only where we have high conviction/confidence or to manage overall portfolio risk.
  • Underweight International and Emerging Markets / Overweight high quality large cap U.S.


  • Yield curve inversion in the 2-10 year timeframe can be cause for concern (historically inversions have signaled recessions), but we are not there yet.
  • Market structure – and lack of liquidity along with ETFs/program trading/algorithms all contribute to short-term market volatility – but we are in this for the long-term.
  • High Yield Bond Market – too much leverage, not enough yield and no liquidity – has the possibility of spilling into the investment grade space that we inhabit.
  • Geo-Political (China, Trump vs Democratic congress, Brexit….).

But go forward into the New Year knowing that we are being attentive to these issues, risks and opportunities – so enjoy your time with friends and family and do so with our collective best wishes from all at Howland Capital.

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