Recent Volatility in Equity Markets Has Highlighted the Benefits of Diversification

Since our last Market Update on November 28th, the S&P 500 is down -5.4% while the Barclays Capital Aggregate bond index is up +1.0%.  While we’ve been cautious on long term bonds since the beginning of 2018, our fixed income allocation with short term maturities has held up well.  We remain focused on high quality, short-term municipal and corporate bonds for all accounts.  Now is not the time to seek new risk in the fixed income markets.

It’s not too late to reduce risk in your portfolio.

Since early in 2018, we’ve been advocating that clients consider reducing risk (incrementally) in their portfolios. It’s not too late to consider ways to manage your portfolio risk.  Prudent ways to manage portfolio risk include:

  1. Managing concentrated stock positions. This can be achieved using a variety of risk management techniques, including charitable donations, options collars or exchange funds.  The recent example of General Electric (GE) provides a stark reminder that there is no such thing as a “forever stock.”
  2. Raising cash to set aside for near-term obligations. Our financial planners generally recommend having 6-12 months of living expenses on hand for peace of mind.
  3. Revisiting how much risk you actually need to take to accomplish your financial plan. A good financial planner can add tangible value to this exercise with the tools at their disposal.

What could turn the equity market around? 

As I mentioned in our November Market Insights post Should You Worry About Market Turbulence?, a mix of negative investor sentiment, slowing global growth, and trade war rhetoric have conspired to push most equity indices into correction territory from recent highs.  How much further down we have to go is anyone’s guess.  Yet US corporate earnings growth remains positive, interest rates are still low, inflation is contained, and valuations are much more reasonable than earlier in 2018.  Finally, any indication of a resolution of the trade tensions with China would send the US equity markets soaring.  On this last point, we are operating under the assumption that neither the US nor China wants to disrupt global asset markets in a significant way.

Finally, because we don’t know the exact date any trade resolution between the US and China will occur, it’s important that clients remain invested in equities (in the appropriate amounts), because (1) the markets are extremely volatile and (2) the opportunity costs of missing a powerful short-term move are too great.  Over the intermediate term, we believe that cooler heads will prevail and that trade tensions will ease.


Gratus Capital is an SEC-registered investment advisor. Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request. The opinions expressed are as of December 2018 and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities. No graph or chart by itself can be used to determine which securities to buy or sell or when to buy or sell them. As with any investments, past performance is not a guarantee of future results. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.