Just the Facts, or the Absence Thereof
Belated happy July 4th – I hope everyone had a wonderful holiday! During the long weekend, I came across an old Star Trek original series episode called “Space Seed,” in which Captain Kirk and crew come upon a two-hundred-year-old spaceship from Earth carrying eugenically “improved” humans who have been in a state of “suspended animation” for two centuries. As the ever-cocky Kirk tries to figure out who these folks are, he proposes a theory to his logic-driven science officer Mr. Spock involving Australian penal colonies sending deportation vessels into space two hundred years earlier. Spock promptly throws cold water on Kirk’s theory, dismissing it as illogical because it has no supporting facts. Sensing his unease, Kirk asks Spock if he suspects any danger. Spock responds: “Insufficient facts always invites danger, Captain.”
As U.S. markets trade at or near all-time highs, many investors are sensing danger, wondering whether the facts supporting such lofty levels are “insufficient;” they cite war in Ukraine, unrest in the Middle East, global tariffs and trade wars, among other things, as evidence that current levels are not sustainable. At the same time, however, there are facts that do support current levels, including generally positive employment and inflation reports, together with some initial progress on trade talks with the rest of the world and anticipation that the Federal Reserve might lower short term interest rates later this year. Whether you believe the facts are sufficient or insufficient, it is important to note that the current market prices are exactly what investors are willing to pay for stocks right now, whatever their respective views of the facts.
At MJB Asset Management, I view facts as facts, neither sufficient nor insufficient; they all offer information, and they all go into our analytical mix along with technical indicators of price movements and momentum that we use to assess potential risk and return as well as entry and exit prices. At present, signals are mixed: the market has been on an upward trend while risk signals are beginning to tick up. In response, I have maintained our core positions in broad large cap equity indices in the US and abroad after eliminating our small cap exposure earlier this year and more recently exiting a small position in a consumer discretionary ETF after a small gain. Given the above-mentioned geopolitical and tariff uncertainty, I am avoiding exposure to industry-specific and regional-specific sector funds, where our analysis indicates the potential risks currently outweigh potential returns. Given the current interest rate environment, where short term US Treasuries are yielding slightly above 4%, I have maintained a three-month US Treasury ladder for more moderate portfolios. For income-oriented accounts, we continue to invest in diversified sources of dividend and interest income, including high dividend stocks, bond funds and limited partnerships.
In summary, we are moving ahead cautiously, monitoring the markets and investment environment for changes that would warrant a shift in portfolios to either more conservative or more growth focused. In the world of Star Trek, we are on yellow alert, proceeding ahead on “impulse power” only. Should risk/reward ratios improve we will return to warp speed; should they deteriorate further, we will go to red alert with deflector shields up!
Thank you as always for investing with MJB Asset Management. I wish you a wonderful summer, and if you happen to have a favorite episode of the original Star Trek series, please feel free to share it with me; one of mine is “The Trouble with Tribbles.”
If you have any questions or concerns about anything discussed in this letter or any other items, please give me a call or send an email. I always look forward to hearing from you!
Disclosure: Financial instruments discussed here may not be suitable for all investors. Before investing in any investment portfolio, Client and Financial Advisor should carefully consider the client’s investment objectives, time horizon, risk tolerance, and fees. The opinions expressed here are as of the date reflected and are subject to change. Diversification may not protect against market risk. There are risks involved in investing, including possible loss of principal. Past performance does not guarantee future results.