Fire Capital Market Update - 2Q 2019

WINTER IS COMING

The subheading is a reference to the hit HBO series, Game of Thrones. The show takes place thousands of years ago and is based on a fantasy world enthralled in war. From the very first episode, the phrase “winter is coming” was used by the main characters to invoke wisdom and warning to those willing to listen. The threat of a long winter, one that would last many years, was used to build anticipation of what could potentially be the end of humanity.

There are many parallels between the show and the current macroeconomic environment, but none more evident than the concept that winter is coming in the form of an economic recession. Like winter, recessions are natural occurrences and happen frequently. Our expectation is that the next recession is milder than the last but that is not a given. With that said, the build up to the end of the story is almost always more intense than the actual ending itself.

PROCESS MINDSET

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

— PETER LYNCH

Despite our growing belief that we are firmly in the latter stage of the business cycle, timing correctly is nearly impossible, and markets can outperform the economy for an extended period of time.

Our approach is to make prudent investment decisions and not aggressively stretching for returns. An opportunistic cash cushion may be warranted, while being mindful that holding excessive cash for extended periods of time often weighs on long-term portfolio growth.

We are not economists (believe me this is a good thing), but we still establish our view on the health of the global economy. We do this to help guide our investment decision making process, not to try to time the market. This also helps us gauge the level of conviction we have in our investment calls. When we have greater conviction, we will express our confidence in client portfolios by taking larger and more concentrated positions. Rising uncertainty and lower conviction is expressed by greater diversification with an emphasis on defensive assets. Right now, our focus is on the latter.

PLAYING THE PROBABILITIES

At Fire Capital Management we have an appreciation for what we don’t know. Our job is to make sound investment decisions with the information that is available. One of the pillars of our investment philosophy is to allocate capital to investments that have far greater upside than potential downside. Specifically, we are looking for investments that have an asymmetric bend to the upside or greater return than risk. Sounds simple, right?

Admittedly, it has become increasingly challenging to do this as the U.S. markets have recently hit all-time highs once again (S&P 500 +17.4% YTD). The fact that the markets hit all-time highs doesn’t bother us. There is empirical research on momentum that indicates new highs are usually a good thing (at least in the short run).We are more concerned with why and how the markets have advanced back to record levels.

TREADING CAREFULLY

Following a rough 2018, it was no surprise that we saw a bounce back in 2019. However, the reasons the markets plunged remain:

• China/US Trade War
• Slowing Corporate Profits
• Global Growth Slowing

Since the beginning of the year, additional risks have been added to the fray such as heightened tensions between the U.S. and Iran, coupled with rising oil prices. Despite these issues, the financial markets rallied on the notion that the Federal Reserve could begin cutting interest rates for the first time since 2008. While lower interest rates are positive for asset prices, it is important to recognize that the Fed would only cut rates if they were concerned about the U.S. economic outlook.

In our view, the global economy is in a fragile state. The combination of both fiscal and monetary stimulus could be enough to sustain the expansion, but if winter is coming, we won’t be caught off guard.

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