Welcome to our first quarterly investor briefing. In these briefings, we will provide an update on what we are seeing in the markets and keep you abreast of the performance of the JSO Equity Model. For more details, we encourage you to contact us directly.

Market & Portfolio Update

As of the end of September, the US stock market is up significantly with the S&P 500 appreciating 1.3% in the third quarter for a year-to-date return of 18.7%. While the markets experienced volatility this summer, they rallied in October on the back of a positive earnings season. The majority of companies that have released earnings have reported in-line or better-than-expected profits.

The JSO Equity Model funds remained flat in the third quarter and reached a year-to-date return of 20.7%. Each of our five funds increased in value with the Akre Focus Fund, our largest holding, contributing the most growth at 30.6% year-to-date. Our lowest performing fund was AMG Yacktman Fund, which reported returns of 10.5% year-to-date. AMG Yacktman Fund managers have conservatively positioned their portfolio by holding a substantial amount of cash (27%) as they await better opportunities to buy stocks at more attractive valuations.

Investment Outlook

While the markets have had strong returns, we have witnessed significant volatility since August. Some of this volatility could be related to recent headlines such as the presidential impeachment inquiry, threat of an escalating trade war with China, and fears of an economic recession. While each of these factors, if materialized, could have a significant impact on the direction of markets, we believe recent volatility is largely explained by underlying fundamentals. Headlines provide a spark to ignite movement, but fundamentals supply the fuel.

From our analysis, we observe two areas of concern in the market fundamentals. First, the S&P 500’s forward price-to-earnings ratio, a measure of how much the market is willing to pay in stock price for a dollar of business earnings, has reached 17.3x, which is 18% above the 10-year average and 7% above the 5-year mean. We interpret these numbers to mean that stock valuations are moderately expensive and at risk of correcting back to the long-term average. Second, equity analysts are forecasting an 11% growth in business earnings in 2020, which we believe to be overly optimistic. If earnings do not meet these projections next year, the stock market is at further risk of a downward correction.

Based on these risks, we have taken a defensive position in our portfolios and moved 20% of the JSO Equity Model (stock) holdings to cash. When stock valuations become more attractive, we will invest this cash back into our equity model. We are not market timers and cannot predict how markets will move. However, we are committed to stewarding our clients’ capital well by prudently adjusting our exposure based on valuations. Our research indicates that reducing our exposure to markets during times of potential volatility is beneficial to portfolio growth over the long term. Managing downside risk when market fundamentals are at risk will reap rewards over time.

Insight Tip

Did you know that the stock market typically appreciates in a presidential election year? Since 1928 the S&P 500 rose 18 out of 22 election years. Will 2020 buck the trend?

If you would like to learn more about the JSO Equity Model, please do not hesitate to contact us.

Contact Us
Phone: (215) 283-3131
Email: team@jsopartners.com