End Of Cycle: IMF World Economic Outlook

http://www.imf.org/en/Publications/WEO/Issues/2018/07/02/world-economic-outlook-update-july-2018

"The balance of risks has shifted further to the downside, including in the short-term".

Friends, this is certainly some confirmation of what we have been suggesting was our view over the last few blogs: that the economic expansion is late in the cycle and the risks of a downturn are rising.

"Possible triggers include rising trade tensions and conflicts, geopolitical concerns, and mounting political uncertainty. "

"Tighter financial conditions could potentially cause disruptive portfolio adjustments, sharp exchange rate movements, and further reductions in capital inflows to emerging markets, particularly those with weaker fundamentals or higher political risks."

Interestingly this follows an increase in client concern over how we are positioning our collective portfolios. Here is a bit of a recap:

1) We are over-weight cash equivalent assets, but have used some of those assets recently to purchase US Government 2 year notes (high degree of safety) to get yield of 2.5%.

2) At the same time we continue to be under-weight global equities (to contain our risk exposure). The dividend yield on the S&P 500 is currently at about 1.8%, so we are actually being paid more (2.5% vs. 1.8%) to hold less downside potential.

If stock markets decline 10-20% over the next 2 years and instead you own bonds that will mature at their par value (i.e. you receive exactly what you invested upon their maturity), you will be considerably better off than if you had a fully invested, balanced 60% equity / 40% fixed income portfolio that experiences a significant devaluation in the 60% of equity assets that you own.

Importantly, the compounding benefits of being fully invested would probably take years to catch up to the more tactically active portfolio, with a more defensive posture.

As this occurs, you will, in time, likely see a large shift from passive portfolio investment (which has grown significantly, largely due to the long upward trend in stock prices) to a more tactical style of portfolio management.

Our High Rock Private Client portfolios will have an advantage when the next cycle begins as they will have preserved a good portion of their net worth and be ready to purchase cheaper (better value) equity assets as the U.S. 2 year notes mature (or perhaps before that).

The end of the expansionary cycle is upon us. It is time to prepare for the next stage.