Investment Climate October 2019

The investment climate in the third quarter of 2019 was marked by significant volatility but little net progress in overall market averages driven by an economy showing signs of slowing down. The result was that the average large stock moved a little higher, small stock averages were a little lower, and interest rates continued to slide giving bond prices the biggest boost of all major asset classes. Thus, none of the net changes in asset prices for the quarter caused much change in the above-average returns that stock and bond markets have experienced so far in 2019. Our own growth portfolios were generally weaker in the third quarter, yet still maintained their market-beating returns for the year while income-oriented portfolios grew at faster paces than average.

We expect this “correction” in growth company prices may continue, as we navigate the historically weak fall season, before resuming strong performance as more clarity on trade issues and the economy comes into view.

We are witnessing an abundance of consternation regarding the state of the economy. Will the trade war with China finally derail the long economic cycle that has persisted since the 2008-2009 financial crisis and accelerated in the last few years? Is yet another “inversion” in the yield curve (long-term interest rates lower than short term interest rates) a sign that we are headed for recession? Is the toxic political climate going to make it impossible to get the myriad issues that face the country addressed by government (healthcare, tax simplification, immigration, homeless and vagrancy in many large U.S. cities)?

These are very real issues that need to be addressed at some point. But the constant drumbeat from the “crisis industry” (otherwise known as the media) appears to us to be missing the resiliency of the business community, particularly in the U.S., but also in some other parts of the world, too. It never ceases to amaze us how the saying our mentor, Dick Taylor, often expressed: “we get by in spite” is so simple yet also so poignant! It underscores that in the real world, outside of what is portrayed every second of every day in the news media, people keep working, creating, innovating, managing their businesses and providing for their families in a way that keeps moving us forward.

This is not to say there are never setbacks -- there are. And they are rarely ever obvious before they happen. This is why we adhere to another saying that came from Dick Taylor’s own mentor, Thomas Rowe Price: “the great fortunes in this country were made by men who owned well-managed businesses in front of fertile fields of future growth, through multiple market and economic cycles.” We are constantly repeating this, and we will continue to do so. This is because we have seen it work very well for our clients over many years.

Currently, the “fertile fields” we are focusing on are largely in technology companies that are “virtualizing” those tasks which used to be done with hardware; building microchips that allow for much longer battery life; creating and allowing us to experience virtual and augmented reality; and using new methods to secure networks from cyber-attacks. Distributed-ledger computing and blockchain are still emerging but we believe these technologies also promise to transform computing in the coming decade.

Fertile fields are also found in medical technology where new ways of discovering drugs utilizing artificial intelligence, genomics, and re-programming DNA are driving great progress in treatment of diseases. And they are in medical device breakthroughs in the treatment of cancer and eye diseases.

New business processes are driving innovation as well, whether it be more productive manufacturing methods based on nanotechnology, digital textile printing or advanced machine learning tools that provide businesses with levels of situational awareness that improve productivity and, ultimately, profitability. Financial technology is transforming the way people save, invest and make payments.

There is always uncertainty in the world, financial and otherwise. The current climate is no different than ever before, although it may seem more upside-down at times. Nonetheless, sticking to these tried, true and simple investing rules makes for the most assured way to invest hard-earned money we have ever seen in our six decades of professional investing. Stay tuned.

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.