2019 Q1 Review

ECONOMIC OVERVIEW

The first quarter of this year saw political and economic tensions creating nervousness and uncertainty in the equity and fixed income markets.  The early quarter rally recaptured much of the wealth destruction brought about by the 4th quarter selloff.  This was in large part due to a change in tone by the FOMC in January.

Sounding more dovish in its rhetoric during a March press conference, Fed Chairman Powell conveyed to the markets that it would keep rates on hold and change the schedule of its balance sheet reduction.  Market expectations for a rate cut increased during the quarter, but a cut seems unlikely given the strength of the job market and the economy.  The world economy still lacks robustness which could eventually affect our economy.

Trade issues will keep investors from complacency especially if Twitter accounts remain functional. Europe may be reaching a bottom, but German economic data late in the quarter showed weakness and political risks have not gone away.  Europe needs some momentum but needs Germany to provide the catalyst.

Japan looks attractive from a valuation standpoint and emerging markets will benefit from a renewed Chinese growth path.

Recent Chinese stimulus will benefit Europe and the emerging markets (commodity producers).  News of a trade agreement would help settle markets which have become more sensitive to daily tariff reports of escalation or easing.  This is a mature bull market for equities and fixed income instruments.  Look for increased volatility to signal a change in market direction.  Both bulls and bears will be committed.  Quality and low volatility are good attributes to embrace when capital is deployed.

FIRST QUARTER 2019

Returns for the SCI first quarter were well received given the poor results in the 4th quarter.  Every fund in our portfolio had positive gains with four funds managing double digit gains for the three months ending April 30th.   Large cap weighted funds performed the best along with the emerging markets ex-Japan position.  This was probably due to investors seeking well capitalized firms with lower implied volatility after the fourth quarter selloff.  As noted above the portfolios were hurt in the 4th quarter but with the help of Mr. Powell, responded as expected with the Fed’s more dovish stance.  Each model exceeded our expectations for the first quarter, ranging from above 3% in the conservative model to above 6.5% in the aggressive growth model.

SECOND QUARTER 2019

The second quarter began with nine new funds in the portfolios.  Though turnover is usually not this high, turnover is dictated by the analysis performed by Sortino Investment Analytics (SIA) and the results they generate for Salt Creek.  Our processes are the same each quarter as SIA analyses our screened dataset and produce for us those funds and managers with the most likely probability of meeting the goals we set for each model and ultimately, your client.  Our core processes have remained the same for every quarter since inception. As with any uncertain outcome, there is always the chance our return objectives will not be met.  This has happened in some previous quarters, but only because those outcomes fell well outside the most likely returns assigned to each model.  Expense ratios for the second quarter were slightly above those for the first. This was due mainly to an ETF (FLOT) being replaced by and active manager (OMBIX) and by only slightly higher expense ratios in the funds new to the models.  Expense ratios range from 0.51% in the conservative model to 0.78% in the aggressive growth model.  Yields for the new quarter models will be higher ranging from 2.37% in the conservative model to 1.10% in the aggressive growth model.  Two of the funds this quarter (GSDIX and MIOIX) have 30-day short-term redemption fees (STRF).  Keep this in mind as clients request disbursements and add additional assets.  Fixed income holdings are overweight agencies and passthroughs, with only one fund manager overweight in the corporate sector.  In the equity portion of the models, industrials, technology, and financials are the most widely held sectors.

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