By Ted Schwartz

It is halfway through 2018 and nobody has investment returns to smile about. Last year we had the calmest and most rewarding of markets. Everything seemed to do well and there was never a need to be worried. After a good January this year, everything changed for the worse. Year to date, the Dow Jones average, the international MSCi EAFE Index, and the Vanguard Total Bond Index are all down 1.5% or more year to date. This is not a horrible net decline, but it feels like it after the remarkable year we just enjoyed.

The odd part of this more difficult time is that we are in such a positive economic environment. Earnings are excellent, consumer confidence is high, unemployment is low, and the new lower taxes are likely to feed future earnings and dividends for investors.

It is good to remember that the market is a “leading indicator” of the economy and not a trailing one. So, the market historically is trying to tell us where we are going rather than where we are or have been. Combining this with the fact that the market has a history of disliking uncertainty gives us a clue of why the market has stalled despite stellar economic fundamentals. We seem to be suffering from self-inflicted wounds at this point. We have ignited trade wars and other geopolitical fears to a frothy level in recent months. Nobody seems to have a clue as to how any of this will play out. As a result, both an expanding global economy and a global recession seem like potential outcomes as we move forward.

What can we do and what steps can we take going forward? We do not think we can insulate portfolios from all the potential risks going forward, but we are trying to assess which risks are increasing in this environment and will weigh these against potential gains. So, we are not looking to reduce potential gains going forward but may make some changes to mitigate your risks as we consider potential outcomes from geopolitical possibilities. As always, we will remain focused on the longer term (3-7 year return expectations) but may make some mid-course corrections by reducing holdings that could be most impacted by the strains of trade wars. In light of this, you may see some changes to your portfolio in coming weeks and months that will be focused on lowering the impact of these international imbalances and disruptions. Keep in mind that in planning financially, we are looking at a time horizon of decades, not months. While we recognize that, after last year’s impressive market return, the losses experienced this year may cause some angst, please reach out to schedule a review to look at your investments in the context of your financial plan.