Covenant Weekly Market Synopsis for April 12, 2019

April 15, 2019

Synopsis 2019.04.12

Last Week Today:  U.S. Trade Representative Robert Lighthizer proposed tariffs on $11.2 billion of European Union products (e.g., fish, cheese, wine, airplanes) in retaliation for subsidies paid to Airbus SE. | The International Monetary Fund revised growth expectations lower for the U.S. (2.5% à 2.3%) and the global economy (3.5% à 3.3%).  |  Initial jobless claims in the U.S. declined to levels not seen since 1969 (see chart below). | Some guy named “Tiger” won his 5th Master’s Tournament.

Global equities moved higher last week with the U.S. leading the way. The major domestic indices tacked on weekly gains of 0.6% at the start of Q1 earnings season, and at the half-way mark in April, markets are up about 3%. As of Friday, the S&P is only 0.8% below it’s September high, with the DJIA (1.6%) and Nasdaq (1.6%) indices not far below all-time highs either. International equity markets recorded slightly lower weekly gains but are pacing U.S. indices on a month-to-date basis. In fixed income markets, US Treasury yields rose and, importantly, the yield curve uninverted at the key points that signal an imminent recession: 10-year/2-year bond maturities and 10-year/3-month maturities. WTI Crude gained 1.3% for the week and, at $63.89 per barrel, the price of crude is up 40% year-to-date.

For specific weekly, month-to-date and year-to-date asset class performance, please click here.

You’re Not Fired. According to the Wall Street Journal, in a phone conversation the week of April 1, President Trump told Fed Chairman Powell “I guess I’m stuck with you.” Far from an endorsement of his work, at least it implies that the President will not take measures to remove Powell from the Fed – a move that would be detrimental to the markets in the short-run and lethal in the long-run to the independence of the Federal Reserve as an apolitical institution. While Trump apparently won’t seek to remove Powell, he is trying to stack the Fed with committee members sympathetic to his views and put forth political loyalists Stephen Moore and Herman Cain as candidates to fill open seats at the Federal Reserve.

Exodus – Investors’ preference for passive over active funds continues unabated as detailed in the chart below. Yes, passive funds have trounced most active managers over the last several years, but that is not new news as the track record of the average active manager relative to his benchmark has been poor for decades.


In the active vs. passive discussion, it’s worth considering that investors cannot invest directly in any index. That is, investors can only gain exposure to an index through an investment product such as a mutual fund, an ETF, or some other type of vehicle[1], all of which have embedded expenses (management fees, trading costs, administration fees, etc.). Hence, passive index mutual funds and ETFs also lag their benchmarks due to fees. However, since they charge lower fees, the underperformance of passive strategies tend to be less pronounced than the average active manager.

Covenant’s position in the active vs. passive debate is to rely on passive management for the most efficient markets but to consider active management options in sectors or geographies where markets are less efficient. That being said, a lack of market efficiency only offers a clue for where to begin searching for active strategies. Because passive strategies offer exposure at such a low cost, any active manager that makes it into a portfolio must exceed high standards. While historical performance is an important consideration, it is only one part of the selection process. Qualitative assessments of the strategy, investment process, buy/sell disciplines, and the people involved play a more significant role than is generally recognized.

Managers that can successfully beat the market over a multi-year timeframe are rare, but worth the search (and paying higher fees). For example, all else being equal, everyone would rather pay fees of 0.32% per year vs. 0.89% per year for portfolio management. However, would you feel the same way after reviewing the table below which shows the actual results of a manager (who shall remain anonymous for compliance reasons) vs. a low-cost, passive index ETF and the benchmark?


While one should always seek the lowest cost option when comparing comparable strategies, sometimes you get what you pay for. In this case, paying an extra 0.57% per year in portfolio management fees for the active manager would have netted a 51% greater return on the investment.

Whether you favor passive or active investing is less critical to long-term success than maintaining the discipline to ride out the inherent volatility of financial markets. Paraphrasing a speaker at a recent Dimensional Fund Advisors Investment Conference about successful investing: “It matters less about how your portfolio looks, but more about how much you look at your portfolio. Like a roller coaster ride, investing can be scary, but the only time it is truly dangerous is when you try to get off in the middle of the ride.”

Be well,


[1] An investor could avoid using an investment product by replicating an index herself. While that would avoid paying a management fee, it would not eliminate the costs of trading to establish the initial positions and rebalance the portfolio as the target index holdings and respective weights change over time.