Weekly Market Insight—May 1, 2019

It’s time to take control of your portfolio!

There are times when investors should be more aggressive and times to be more conservative. History clearly shows that most investors mistime their aggression. They are scared to invest when the opportunities are greatest and eager to invest as the opportunities dwindle.

Investors have been overly cautious during most of the bull market, and worried more about preserving capital than searching for opportunities. Individuals invested for “safe” fixed-income instead of equities, and institutions underweighted public equity for more expensive absolute return strategies. Their typical metamorphosis from bears to bulls once again seems ill-timed. Rather than joining the party at this late hour, investors should be sobering up. It’s time to be your portfolio’s designated driver.

April 2019 shows investors are indeed getting more bullish Reliable sentiment data show that investors are slowly but surely getting more bullish about equities. Some might say that the absurd valuations investors are paying for “unicorn” IPOs reflects excessive bullishness.

The only time the Street recommended overweighting equities was during and immediately after the Technology bubble. US equities performed miserably during the following decade.

Wall Street’s recommendation to underweight equities mirrors investors’ anxiety during the past decade’s bull market. Wall Street is still recommending an underweight today, but a more bullish consensus is clearly forming.

Investors are not showing the classic euphoria that accompanies market peaks, but how can investors be more bullish today than at any time in the past 8 years? It makes better sense to be incrementally cautious today when profits are beginning to decelerate and the yield curve is very flat versus 10 years ago when profits were accelerating and the curve was steep.

The US profits cycle is poised to significantly decelerate in 2019. On a GAAP basis, 2018 S&P 500® profits growth exceeded 20%. We are forecasting profits growth for 2019 will slow to between 0-5%. The risk of a full-blown profit recession could increase toward the end of the year.

Although some issues (such as trade war resolution) might alter the contour of our forecast, we very strongly doubt that any such issue will totally prevent the profits cycle from decelerating. Perhaps profits growth slows from 20-25% to 5-10% by year-end because of changes in policy, but the deceleration of corporate profits during 2019 seems certain.

History shows that it is generally beneficial for investors to sober up during periods when profits decelerate. Riskier strategies tend to perform better when profits accelerate.

It’s never fun being late to a party. Everyone has been having a good time, and you’ve missed out. However, trying to jam all the fun into the party’s last hour is never a sensible idea. It’s probably better to simply admit you were late and be the designated driver for all your party-hardy friends.

The bull market started in March 2009 and is now more than 10 years old. Trying to recoup 10 years of missed excess returns into one’s portfolio at this late date probably isn’t sensible, but the data are suggesting that’s exactly what investors are starting to do.

Investors are always the most bullish in the final stages of a bull market, and then subsequently regret their aggressive imprudence. The combination of decelerating corporate profits, liquidity that’s starting to dry up, and investors’ incremental bullishness is starting to signal to us that we should consider being the designated driver at this party. No one knows when the party is going to end, but we feel confident that our budding conservatism will ultimately prove beneficial.

At MRP Capital Investments, LLC we use a relationship based approach where our CFP(r) prepares a customized financial plan for you and your family. Then our Chartered Financial Analyst individually tailors a portfolio using a Behavioral Finance based approach.

Thank you for taking the time to view this. Please consider me as a resource for any financial questions you may have. I am always glad to offer guidance when I can.

*The information contained in this report is for information and analysis only. It is obtained from sources we believe to be reliable, however we can not guarantee its accuracy.

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