Chris Pic

2Q 2016: Quarterly Investment Letter

QL 2

Just close your eyes and pedal!

In June, I took a Backroads cycling tour of Washington State’s San Juan Islands. On the third day of the journey, trip leader Katie Roda described our trip in the pre-ride wrap: “There’s a big, long, slow hill in the middle of our ride, but don’t worry. I’ve seen you guys cycle. You can do it! Just close your eyes and pedal.”

Genius! Sometimes the best strategy is to just close our eyes and pedal. I cannot think of more salient words for our global economy today.

Since the Great Recession, we have experienced a global, slow recovery. We are gradually making economic progress, but not feeling like we are really getting anywhere. This has been a big, long, slow financial hill. Brexit (Britain leaving the European Union) added another steep, uphill leg to this slow recovery. Will we be able to make it? Initially, the markets sold off, fretting that we wouldn’t be able to recover, and then rebounded after a few days.

The outcome from Brexit is unknowable. What we do know is that it is going to take time to negotiate and that it is at least two years from the first deadline. This makes me think that we have at least three years before we know the real outcome of this change. During the next few years, Europe and the rest of the world will need to keep pedaling up this long hill. There is no other choice. It isn’t really possible to stop pedaling on a hill–and we will not.

What does this mean for thoughtful investors?

First, let’s remember that our goal is to get up the financial hill. We need some strong resolve to meet this goal. We need to keep our long-term perspective and not let a short, steep incline cause us to stop pedaling. Sticking with our long-term strategy right now is most important.

Second, we can’t ignore the next 10 feet in front of us, either. As I rode alongside Katie for part of our journey, I joked with her: “Really? Close our eyes?” Her reply: “Not quite. Know that you want to get to the top of the hill, but just look at the 10 feet in front of you. Don’t get psyched out by sizing up the whole hill at once.” I believe that Katie’s words are really good guidance for cyclists and investors alike.

RegentAtlantic’s view for the next 10 feet:

• The European Union and the United Kingdom begin negotiations that will last a long time and probably not change things too much from where they currently stand. The European Union and the United Kingdom are each other’s most significant trading partners, making a punitive separation painful for both parties. We expect both sides to posture up, but not to take too strong a stand past the status quo.

• This Presidential election is probably one of the most unsatisfactory elections in my lifetime. It seems that the vast middle of the population can’t get firmly behind one candidate or another. At RegentAtlantic, we think this means that, despite the rhetoric on both ends, no one really has a mandate to make change. Financial markets like stability. And the inability to make change is a loose form of stability. For the markets, status quo is good.

• Brexit has forced the Fed to push out the next interest-rate hike by a few months. We are a global economy, so Fed moves must be measured by the impact on the global economy, not just the U.S. market. If only the United States was involved, the Fed probably would have increased interest rates already, given that the economy grew at 2.1% last year, the unemployment rate at 4.7% and inflation at 1.0%. (Source: Bloomberg)

Wow! It was really nice to have Katie as a ride leader during my Backrounds trip. She’d done her research, knew the local terrain and was always calm and reassuring. Likewise, RegentAtlantic advisors know the financial terrain, have done their research and are ready and willing to help you on your economic journey.

If you have any questions or concerns, please contact your Wealth Advisor or please contact me directly by email or cell.

Happy pedaling!
Chris Cordaro
Managing Partner, Chief Investment Officer and Wealth Advisor

 

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