Market Commentary


April 2015

"Marlin: "How do you know nothing bad won’t happen?"
Dory: "I don’t."
– from Finding Nemo

We’ve been in a drought here in California for four years now. One year in, two years in, three years in, four years in, all during that time we did nothing. Now, four years in, rainy season over, we look up into the Sierras and see there’s no snow, so now six months more of drought are virtually guaranteed. Only now that we are in an emergency, conservation measures are underway, and a problem we’ve known about for four years is being addressed. Long-ranging studies of California weather show that droughts can last up to and including decades, and that the past 100 years have been some of the wettest on record in the area.[i] If our drought goes on for much longer, there are additional risks and opportunities, bigger expenses related to water, and changing food distribution patterns across the country. California will get through it changed, but okay. One marvels, though, at our seeming inability to do anything about an increasing probability of there being a pretty large water crisis until it’s an emergency.

Jamie Dimon, the head of J.P. Morgan, said something interesting the other day in his annual letter to shareholders. The head of the largest bank in the United States, with $2.57 trillion in assets, stated that there would certainly be another financial crisis and that for a number of reasons it would bring even greater volatility than the last financial crisis.[ii] While there’s no timing estimated or stated by Dimon or anyone else for when this may occur, it’s not a controversial expectation, even if you are the head of the biggest bank in the country, to virtually guarantee another one at some point, much like guaranteeing drought in California.

For now, however, while stocks are expensive, the environment here in the US continues to look pretty benign on the surface: the economy continues to grow, inflation is low, a strong dollar has given the economy a pause that may in fact deter the Federal Reserve from raising interest rates for the time being. Perhaps the Fed will raise rates in June – but perhaps they won’t.

Meanwhile, overseas, stocks are rallying in response to lower interest rates abroad. After four years of underperformance relative to the US, Europe is looking more competitive with a weaker Euro, and China’s drop in interest rates has staved off a too-drastic drop in economic activity in Asia. International stocks, with a particularly accommodating set of central bank policies overseas, look poised for a good run, which is key with your portfolios weighted somewhat evenly between the US and overseas.

So all is well, right? Well, no, not exactly. We are watching a few signs that keep us somewhat cautious and demanding a continued high degree of flexibility in your portfolios: oil price swings continue to impact the price of investments and we think ultimately the level of economic growth particularly in the US, a continued strong dollar creates uncertainty for us and other countries, and global central bank policy is not necessarily all still running in the same direction. And, we maintain that stocks are expensive, particularly in the US, and while valuation is not necessarily a harbinger of difficult times, highly valued assets are more vulnerable to corrections when they do come.

We’re therefore working in many of your portfolios to take advantage of core opportunities there. While your portfolios have lagged during the past few years, we aren’t trying to chase returns but we are setting the portfolios up to maintain some ballast while taking on reasonable risks in an environment that could turn to drought, or crisis, at any point in time. A critique that we have of our portfolio management for you in the past few years is we have been working too hard to protect you from systemic risk, e.g. the risk of drought or financial crisis, while not exposing you to enough market risk, e.g. higher levels of exposure to the stocks of quality companies for the longer term allocations in your portfolios. We continue to be cautious, but also know you need to be in the game.

Who knows how the next financial crisis will start? The head of JP Morgan doesn’t know how it will start, and we don’t know either. In the meantime we want to continue to keep you invested for reasonable returns in an environment where there are many possible short- and medium-term outcomes in the broader markets. As always, we and your core managers would welcome the opportunity to get you more fully invested at more opportunistic prices – a tenet of our value philosophy. In the end, we know the drought as well as any nascent crisis will also be guaranteed to lead us to certain opportunities as well as expose you to some pretty big risks. We acknowledge the latter while continuing to seek out the former.

This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.

[i] See for example,

[ii] See

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