Broker Check

2019 Q1 Letter to Clients

April 09, 2019

Dear Clients,

Spring gardens have finally been planted, baseball is in full swing, the Warriors are closing out their regular season run in the Oakland Colosseum and heading for the playoffs, and the San Jose Sharks are skating well. As we look toward enjoyable spring weather we are pleased to present our quarterly review.

First Quarter 2019 in review

Commenting on the last quarter of 2018 we noted the S&P 500 declined 14% for the quarter and was down 4.4% for the year. In contrast, the S&P gained nearly 15.5%, Nasdaq gained 18.94% while U.S. core bonds were up 2.55 % year to date thru April 4, 2019. The Nikkei returned 8.5%, MSCI EAFE was up nearly 12% in U.S. dollar terms.

In March the U.S. bull market hit its 10-year anniversary. It is officially the longest bull market in history. Given the long duration of said bull market, we do not believe it will simply die of old age and we do not see a recession coming in the near term. We are, however, late in the business cycle and as such, we need to be mindful of slowing growth both domestically and globally.

The Federal Reserve, relying heavily on data for its rate pattern, have led markets to anticipate stable rates for the rest of 2019. In fact, mortgage rates saw their greatest drop in quite some time. We do expect value stocks with their more defensive characteristics to finally outperform their growthier counterparts with certain tech stocks being the possible exception. Recent central bank patience has renewed our interest in extending duration in fixed income as a hedge to equity volatility.

Investing through business cycles

Business cycles are identified by four phases, namely: expansion, peak, contraction, and trough. Some may add recession as a 5th cycle. Recession can be simply defined as a marked drop in capital expenditures that at first seems benign but if it continues for an extended period can lead to a trough.

Howard Marks in his book "Mastering the Market Cycle: Getting the Odds on Your Side" wrote:

Cycles are inevitable. Every once in a while, an up- or down- leg goes on for a long time and/or to a great extreme, and people start to say, "this time it's different". They cite the changes in geopolitics, institutions, technology or behavior that have rendered the "old rules" obsolete. They make investment decisions that extrapolate the recent trend. But then it usually turns out that the old rules do still apply and the cycle resumes. In the end, trees don't grow to the sky, and few things go to zero. Rather most phenomena turn out to be cyclical.

We believe there are signs, that may help to determine where we might be heading. One can easily make the case that the U.S. profit cycle is slowing. Many refer to this as being late in the cycle.

So how does one invest in this late cycle environment where corporate profits are shrinking and in many cases are in negative territory when compared to prior periods? We do not have the time in the context of this letter to detail all the reasons why we believe we are heading out of the expansionary cycle and into a recessionary environment, but we can share our portfolio ideas that can help reduce volatility and perhaps help to make a little more profit. We can see that shifts between business cycle phases create differentiation in asset price performance. Stocks perform best during the expansion or early cycle, then moderate during the other phases, and decline in the recession phase. Defensive assets such as investment grade bonds, national municipal bonds, and short-term debt instruments can outperform, with their best returns occurring during a recession, and perform poorly compared with stocks during the expansion cycle.

Here are some of our weighting biases:

  • Underweight US 10-year Treasuries, S&P 500, Russell 2000, Financials and the Nikkei.
  • Overweight REITs, Utilities, Emerging Markets, Natural resources.
  • US Treasuries are taxable at the Federal level and are exempt from taxation at the state and local levels.
  • Short term treasuries make sense for residences of high-income tax states such as California, Hawaii, Oregon, Minnesota, Iowa, New Jersey, Vermont, and the District of Columbia.


We mentioned in our last letter that we intend to stick to our knitting through these market cycles relying on a process of portfolio adjustments that reflect where we are in the cycle. If we manage properly through the cycles, we hope to nudge the odds of success in your favor.

Warren Buffet is credited with having said: "The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own." In other words, we will continue to work hard to earn the trust you have given us.

Upcoming events with SVWA

We are busy planning SVWA get-togethers so that we may have an opportunity to see you at our:

  • San Jose Giants Patio Party on May 18, 2019 for a 5:00 p.m. game.
  • Summer Educational seminar, more information to follow.
  • Fleet Week aboard the Wine Therapy boat on the San Francisco Bay. This is set for the first week in October 2019, more details to follow.

Personal Notes @ SVWA

Tracy and Roberta went to Whistler B.C to attend niece Taylor and now hubby Zack's wedding. The ski village at Whistler is very well laid out with no auto access allowing for an enjoyable walking experience. The snow was great, runs and lifts smartly designed. Highly recommend a trip to Whistler. Congrats Taylor and Zack!

Chris: I have had an interesting year so far. In late 2018 I was diagnosed with a herniated disc in my neck. With a lot of support from my family, and from the team at work, I decided surgery was the best route. I had surgery on February 13 to replace two herniated discs (C5-C7) with artificial discs. This procedure has only been FDA approved for a couple of years and is similar to the technology that is used in an artificial knee. I woke from surgery and instantly knew that my nerve related pain was gone. As I write this it is about six weeks later, and I feel almost 100% again. This experience really gave me a new perspective on life and made me more appreciative of the many blessings I have in life.

Scott and Denise had a fun ski trip weekend up in Bear Valley with the family. Getting ready to send my son Tyler off to college.

Monique: I love spring! With all the rain, the hills surrounding us turn a vibrant green and flowers are abloom (achoo). Letting me know it is time to switch from baking cookies to planting. I have fun planting wildflowers and repotting my growing succulent population. For me, it is also time to grab a book, sit in the sun and read my heart away.

Jim Karel celebrated the end of the Golden State Warriors presence at Oracle arena with having his 3 kids come in for a game. Sophia and James came up from USD in San Diego and Katherine down from Spokane, WA. The Warriors stunk that night, recording the 2nd worst loss in Coach Kerr era. However, fun was had by all at a family reunion in Marin, where they spent time with their 4 aunts and cousins!

As always, we appreciate your confidence and welcome your questions.

Gratefully yours,

The Silicon Valley Wealth Advisors Team

Tracy Lasecke, CFP®Chris Duke, CFP®Scott Yang, CPA, CFP®
Monique RuizJames Karel


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