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Third Quarter 2019

Equity and fixed income markets continue to display amazing resiliency three quarters of the way through 2019.  The S&P 500 index advanced 1.7% and the Bloomberg Barclays US Aggregate Bond index gained 2.27%.  Despite the occasional air pocket, the risk trade reigned supreme through the first three quarters of 2019. 

Global Asset Class Returns Q3 2019 Chart

Despite the impressive capital market returns year-to-date, investors are absorbing a weak economic report (ISM, a key manufacturing benchmark) at the writing of this letter.  Thus, we believe it may be too early for investors to take a victory lap for another profitable year given the very weak ISM data.  

 Stocks Continue to Defy Gravity

 Twelve months ago, economists and investors assumed the Federal Reserve would sustain its gradual rate tightening path on the heels of steady economic growth, robust consumer spending, and record-low unemployment.  We were certainly no exception to this consensus – we preferred lower duration (shorter maturities) fixed income exposure and diversifying & defensive equity exposure. 

 By the fourth quarter of 2018, the market began to realize the trade war with China would spill into 2020.  Before long, global economic growth indicators took a tailspin and equity investors started to head for the exit.   President Trump – seemingly unaware it was his own policy that triggered the sell-off, embarked on a Fed-bashing Twitterstorm. 

 Fast-forward almost a year to today and it is clear the Fed’s policy response of returning the punchbowl to the party in the form of rate cuts can best explain equity and bond returns on a year-to-date basis. 

 In short, the Fed capitulated.  Equity markets soared – they love loose monetary policy – while the 30-year bondholders looked like geniuses.  Indeed, the 30-year bond yield hit a record low of 1.95% on August 27th.


On September 14th the world’s largest oil processing facility was attacked by multiple missiles in Abqaiq, Saudi Arabia.  An international investigation concluded the missiles originated from Iranian territory, despite Houthi rebels (a group backed by Iran) in northern Yemen claiming responsibility.

The strike on Saudi immediately raised the stakes in the ongoing conflict between Saudi (US-allied) and Iran.  Iran has been pestering oil tankers in the Gulf for the better part of the year.  It also shot down a US-flagged drone.  According to The Economist:

"The attack appears to be the most dangerous escalation yet by the Islamic republic in its simmering conflict with America and its allies. After months of saber-rattling and increasingly brazen acts of aggression—from mine attacks on ships to the seizure of a British-flagged oil tanker—Iran (or its proxies) has moved on to strike directly at the jugular vein of the world’s economy. The barrage, by a mix of cruise missiles and drones, also marks a worrying transition to open war from the shadowy proxy conflict that Iran has waged with Saudi Arabia and its allies.” 

It was a bold move by Iran, and the timing of the Saudi strike was opportunistic for Iran.  President Trump has already backed away from directly engaging Iran militarily.  Iran is clearly testing the United States’ resolve to engage.  We believe President Trump is doing everything possible to avoid any military conflict given his focus on the US economy.  Oil futures jumped 20% the day after the Abqaiq strike, thus a severe disruption to the energy supply chain could easily throw the globe into recession.     


Our UK friends continue to navigate “Brexit”.  The process has certainly become more protracted, divisive, confusing, and frustrating for anyone attempting to wrap their head around how this process will conclude.  I liken it to a game of cricket for the average American:  no one has the slightest clue what is happening, and it seems to keep going on and on, with no end in sight! 

 Our best guess is Boris Johnson (or his successor, given it is quite possible he may not last the month of October) will eventually negotiate some deal with Brussels.  This would ideally lead to a less disruptive impact to financial markets.  Such a deal will likely follow yet another extension from then EU.

 Should Brexit conclude in a “no-deal” we’d expect a spike in volatility, continued pressure to the British Pound, and general pandemonium in the UK and Europe.  Such a conclusion may spell considerable opportunity for the likes of Warren Buffett – we would not be surprised to see Berkshire pursue one or more large acquisition targets in the UK and Europe.  Along those lines, while our Oakmark International fund has struggled of late, we may use further weakness to add to our positions should Brexit uncertainty persist or even increase.


The House of Representatives is proceeding with an impeachment inquiry of President Trump following a whistleblower claim made by a current CIA employee.  The President allegedly pressed the newly elected Ukrainian president to investigate Joe Biden’s son regarding potential corruption actions.  It is further alleged that the administration delayed the remittance of foreign aid to Ukraine in order to establish a leverage point with the Ukraine, i.e., extortion.  Mr. Trump claimed he was investigating international corruption claims.  We question this logic – one would expect such an investigation to rest with Department of State experts, not the President’s personal attorney.

A chart of the United States Democratic House members who support impeachment

The White House has released the declassified call transcript, but the whistleblower maintains that there was preceding and earnest efforts to “lock down” all records of the phone call. Furthermore, it is now believed the same national security loophole used to stifle dissemination of the Ukraine call was also used for calls between Mr. Trump and leaders from Russia and Saudi Arabia.
While all of this could have changed by the time you read this letter, we believe at a minimum, market volatility will increase due to the progressive (perceived as anti-business) Democratic platform, softening economic data, prolonged trade wars and Middle East strife. Should new findings reveal there was a coverup of dubious discussion between Russia and Saudi (presumably regarding the Jamal Khashoggi assassination) it is likely the Trump impeachment effort will gain directional support among Senate Republicans. The visualization on the previous page illustrates the steady increase in support for impeachment among Democratic House members. (Source: The Economist, September 25th, 2019). This is not our base case assumption. However, should this scenario play out, we will be eager to take advantage of market weakness for buying opportunities.
(Trying to) Stay Objective
We encourage our friends and clients to rely on multiple and credible sources of information. As an experiment, I recently spent a few hours viewing impeachment news coverage on both CNN and Fox networks. While I’ve always known there was a strong political bias on each side, in my opinion the degree of “tribalism” has never been stronger.
We should be reminded of the famous words of Winston Churchill – “Many forms of Government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.…”
We should all have faith that a semblance of the truth will eventually prevail … this too shall pass! In the meantime, the Patriots are 5-0 and the Bruins regular season is under way!
Carl R. Hall, CFA
Chief Investment Officer
Wealth Management at Century Bank logo.
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