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Welcome to Cardan Capital Partners’ second edition of “The Helm,” a quarterly market update providing a quick-hit look at general portfolio changes, our read of the markets and what we see ahead. We’re happy to provide our clients with more details — and we also welcome hearing from people who may be interested in Cardan’s financial services. This report focuses on the third quarter of 2018, ending Sept. 30 — and acknowledges some of this month’s market changes.

The bull market in U.S. equities continued to rocket in the third quarter, posting the best quarterly return for the year at 7.65% (SPY ETF Q3 Return). However, at the time of this writing, we also must note that the first three weeks of the fourth quarter have created stress among investors. Why? The market already has given back most of those third-quarter returns, and bond yields have risen sharply over the same period, sparking a selloff in bonds as well (as yields rise, bond prices fall).

With stocks and bonds falling in tandem, many investors have worried — so we recently wrote about the role bonds play in a portfolio and also about stock volatility, trying to put into historical context the daily drawdown experienced on October 10, when market indexes fell more than 3%.

As we move into a world where central banks globally withdraw liquidity to normalize monetary policy, we can expect market volatility to increase. That stated, the fundamentals and economic backdrop appear to continue to support stocks. We believe we are in a period where it will not benefit to be too aggressive or too defensive.

The Allocation

No significant changes have been made to the allocations of our models. However, because of lackluster performance in most asset classes this year, we will look to take tax losses where possible across many of our strategies. Tax-loss selling will not have a major impact on the models’ current allocations.


The most recent selloff has been significant and broad-based. As of Oct. 22, the average stock in the S&P 500 is down approximately 18% from its 52-week high, and only 19% of stocks remain above their 50-day moving average. The market winners of 2018 — growth stocks — have now come under pressure as investors appear to be looking to lock in profits where they can find them.

We still believe the economy is relatively sound and that the stabilization of the bond market will bring about stabilization in equity markets. Another potential market stabilizer is the outcome of the midterm elections, which will remove some unknowns from the markets’ equation.

Investors in our Core Equity and Core Equity Moderate portfolios saw the sale of one company in the third quarter of 2018. We sold Integrated Device Technology (IDTI) and purchased MongoDB (MDB), Alteryx (AYX) and Cambrex Crop (CBM). MongoDB and Alteryx are technology companies focused on helping firms with next-generation database management and data analytics. Cambrex is a healthcare company focused on products and services for the discovery and commercialization of human therapeutics.


The bond market is beginning to look oversold on a few metrics. If correct, this should provide relief in bond accounts and place an underpinning on valuation for stocks. One interesting metric that should provide some solace for stock investors is that high-yield spreads remain tight (this is the difference in yield between a treasury bond and a high-yield corporate bond). That credit spreads — which traditionally have been an early indicator of economic trouble — remain tight, implies there are few signs of concern in the bond market despite the most recent turmoil in the financial markets.

Another piece of the rate puzzle to consider may be the topping of inflation expectations. Five-year, breakeven rates (the markets’ expectations for inflation) are now at their lowest since the start of the year (see chart below). In fact, a five-year, breakeven rate below 2% would suggest inflation is below the Fed’s mandated target of 2%. Falling inflation expectations may give the Fed the option to exit its current rate path sooner than many envision.

Source: Bloomberg L.P. prepared by Cardan Capital Partners

The Markets

Looking back at 10 years of this bull market — post the Great Financial Crisis — the stock market (S&P 500 Index total return) has been up almost 400%. However, the path to those returns has been met with volatility every step of the way, and at no point has it felt as if investors could let down their guard. At the risk of inducing anxiety, consider some of the events investors have had to look past to realize big gains. At the time, each seemed cataclysmic:

  • Greek bailout (April 2010)
  • Flash Crash (May 2010)
  • Quantitative Easing — or QE1, QE2, QE3
  • Japan Earthquake and Tsunami and Fukushima Daiichi nuclear disaster (March 2011)
  • S&P downgrade of U.S. debt (August 2011)
  • Eurozone meltdown (Summer 2011)
  • United States Fiscal Cliff (November 2012)
  • Taper Tantrum (July 2013)
  • Chinese slowdown (Fall 2015)
  • Syrian War

The big events and even bigger headlines will continue — and it is perhaps easier than ever to find an article to support every opinion (welcome to the world of confirmation bias) — but remember: Much of what is breathlessly billed as “breaking news” is not actually economically important. The markets will continue to separate wheat and chaff.

The Economy

Based on consensus forecasts, it appears the GDP print for the fourth quarter of 2018 and first quarter of 2019 are the high-water mark — at least in the near-term. Professional forecasters, generally an optimistic bunch, are forecasting a peak of GDP growth beginning in the fourth quarter. There is no recession in sight yet, but there is potentially slowing growth.

The Federal Reserve has increased interest rates for the last three years as it works to stay ahead of inflation and to give itself room to lower rates at the onset of the next economic slowdown. Where and when the next slowdown arrives will be hard to discern, but a few hairline cracks have begun to appear.

While investors fight the last bear and look over their shoulders at the previous culprits — the big banks — there have been grumblings that regional banks now could be the cracks in the foundation. One Arkansas regional bank’s stock recently fell about 25% in one day as it wrote down two loans in its commercial real estate portfolio. Via PYMNTS.com:

The increase in the 10-year Treasury rate may be starting to bite for regional banks and for homebuilders. The chart below shows homebuilders and regional banks plotted with the 10-year Treasury.  The most recent move up in the 10-year rate has been met with a resounding move down for those sectors – as concerns around continued strength in housing comes into question.

Source: Bloomberg L.P. prepared by Cardan Capital Partners

Which of these data points, if any will be meaningful into the future?  That is an answer we do not know yet, and in fact they may go into the history books as more chaff than wheat.

Summary Snapshot

Since our last quarterly update, we maintain our position that while fundamentals are still relatively sound, and recessionary headwinds are currently not an issue, geopolitical risks remain, and volatility will be with investors for the foreseeable future. For the time being, our portfolios will remain positioned for economic growth until recession rumblings are detected. In the meantime, we will continue to work with you to ensure your portfolio matches your personal needs and risk tolerance.


Positives Negatives Unclear
Earnings growth Italian budget Yield curve
Strong employment Trade war Stock market action
Low inflation Fed Rate hikes Midterm elections
Leading economic indicators China slowdown


Source: Bloomberg L.P. prepared by Cardan Capital Partners

Disclosures: Any reproduction or distribution of this presentation, as a whole or in part, or the disclosure of the contents hereof, without the prior consent of Cardan Capital Partners, LLC, is prohibited. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this document. Investments in securities entail risk and are not suitable for all investors. This is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. For further information please see Important Disclosure Information

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