We’d like to extend our best wishes to everyone for the New Year; may 2019 bring you health, happiness, and prosperity. The New Year is a time to both reflect back on the previous year and look ahead as we plan for the coming 12 months. As we look both behind us and forward, we wanted to take a moment to share our thoughts with you.

2018 was an interesting year (remember the ancient Chinese curse: “May you live in interesting times”?). With the last few months of 2018 bringing a sudden storm of market volatility, this is a good time to take stock and discuss our portfolio positioning for the coming year. The volatility, while sudden, was not much of a surprise; we have been expecting it for some time. After all, the past decade of near-continuous and rapid growth are far outside the norm if you consider markets over full historical cycles. That unusual stretch was bound to come to an end at some point, bringing a return to what we regard as a more normal market, with greater fluctuations and more unpredictability.

Curiously, this is where we feel comfortable and in our element, as the portfolios we build are meant to weather this kind of market activity and thrive despite uncertainty. We believe that trying to predict the stock market is never a winning strategy; our focus is always on long-term trends and fundamental value, seeking out investments that don’t rely on market timing. And of course, we recognize that diversification is one of the most important tools in our toolbox for risk mitigation; to that end, we ensure that client portfolios are fully diversified and incorporate a variety of non-correlated assets, including global assets and alternative investments where possible.

The portfolios we build are strategically designed for the long term. In our world, that means that environments like these are part and parcel of what we expect as we move through market cycles. It may feel like a shock after a decade of bullishness, but from a perspective of many decades, it is part of the process. On the other hand, while we look to long-term cycles to guide our outlook, the future is always new. While history may have repetitive echoes, it is never a repetition.

So, as we look ahead, there are a number of influences that are likely to impact the investment environment in the coming year. The world is experiencing disruption in unprecedented ways, across numerous fronts. Global growth is currently slowing, with trade tensions and looming trade wars to complicate things. The ongoing clash between globalism and populism is reflected in political events across the globe, and political uncertainty always takes its toll in the stock market. Demographics continue their inevitable shift, with western populations aging and developing countries experiencing the expansion of a new and growing middle class along with overall population growth. There is a slowly increasing global will to take action to address climate challenges. And technological disruption is accelerating, bringing both opportunities and challenges as we adapt to a shifting technological landscape.

Domestically, the U.S. job market appears to be as strong as it’s ever been and inflation remains low. However, we are facing both a tightening of monetary policy, as the Federal Reserve works to normalize things post-QE by unwinding its balance sheet, and raising short-term interest rates — a double headwind to markets that exacerbates the existing uncertainty.

We are excited about the opportunities we see in this environment. Our research in impact investing — finding ways that investors can participate in making the world better while earning strong returns — has uncovered significant potential, particularly in the thematic areas of water, agriculture, resource efficiency, and life sciences/healthcare. Equity valuations are becoming more attractive at lower prices, and offer an opportunity to buy lower. The demographic and growth characteristics of foreign markets remain attractive, particularly at current valuation levels. And the universe of private equity investments offers some deeply compelling investment opportunities. All told, there are plenty of reasons to be optimistic going into 2019.

This year, we advise you to batten down your mental hatches and prepare for a return to volatility. Remind yourself why you are a long-term investor and how your strategy supports that perspective. There may be some discomfort along the way, we recognize that — but volatility you expect is much easier to manage than volatility that comes as a surprise. We are well prepared to weather the coming disruptions, and to take advantage of the opportunities.

Happy New Year,

Co-CIOs Tony Arnerich and Bryan Shipley, CFA, CAIA