We recently attended the Pershing INSITE conference in Orlando Florida, where we had the opportunity to hear from some of the top strategists and economists in the world. One of the best speakers was the Chief Strategist for JP Morgan, Dr. David Kelly. He described the current markets using the illustration of “Vodka & Espresso”.
What did he mean by this? He relayed a story about some friends from Sweden who would always amaze him with how much espresso they consume during the day after a night of consuming an equally astounding amount of vodka at night. In this analogy, the espresso is a stimulant, and the vodka is a sedative. In the current market, he views the ‘stimulants’ as tax cuts, very strong corporate earnings and consumer strength, which all act as positive catalysts for continued growth in the stock market. The trouble in the short term is the sedative (the vodka). Negative factors such as tariffs, the threat of trade wars, the threat of rising interest rates and Euro-skepticism from large European countries like Italy and Spain are the dark clouds that are currently counteracting the positive stimulants in the market.
2018 has been a year-long war between scary policy/political headlines (vodka) and strong market & economic fundamentals (espresso). The markets have struggled to gain any momentum due to these opposing forces. We still expect that over the next 6 months, the positive should overwhelm the negative and the market will trend upwards, but in the near-term, volatility looks set to continue until we find some resolution and clarity to some of the biggest issues.
Time will tell how this all plays out, but the reason why we need to take notice of trade negotiations is that if trade worries begin to hurt U.S. corporate earnings, then one of the most important drivers behind this stock market rally will begin to deteriorate. This would not be good. We remain comfortable with where your portfolio is positioned. At the beginning of 2017, we took a fairly defensive position, in anticipation of higher volatility. So far this year, this has proven to be a prudent approach. We will continue to monitor these market developments and communicate any changes that we decide to implement.