Dinner debates are an annual tradition for many households on Thanksgiving. If the market becomes a topic at your table this year, here is perspective on timely issues your relatives will be thankful for.

Where is the market heading? 

When people discuss the market, this is the proverbial question.

In a September post, I described why I thought the investment cycle was nearing a peak.

Next quarter, Hedgeye is calling for both growth and inflation to slow. They call this macro setup "Quad 4." Historically, it's an environment which favors defensive plays (i.e. bonds and defensive sectors).

Things that normally don't perform well in Quad 4? Pretty much everything that has worked well over the last two years. Namely momentum, technology, and high-beta. These factors may see a bearish rotation in upcoming months."

In October, the S&P 500 saw it's largest monthly decline since 2011. Meanwhile, the factors mentioned above are trailing the market by a considerable margin this quarter.

 

For two years, economic growth in the U.S. accelerated amid a tame inflation backdrop. That led to persistence performance trends.

Now that the outlook for growth and inflation is cooling, portfolio managers are adjusting to better insulate their exposure to a harsher macro environment. That's what sparked the recent risk-off rotation. That's why momentum stocks like Amazon stopped going up everyday, and commodities, like oil, are rolling over.

I think the risk-off environment will linger through at least the first quarter of next year.

Regardless, I'm comfortable maintaining a late-cycle, capital preservation focused portfolio.

Isn't the economy doing well?

Indeed it is.

Consumer confidence is at the highest point since September 2000.

Recent ISM surveys indicate the manufacturing and service sectors remain in expansion mode.

The unemployment rate hovers near a 50-year low at 3.7%. Job openings reported by the U.S. Bureau of Labor Statistics have nearly tripled since the recession low in 2009, and wages are rising. Former Fed-chief, Alan Greenspan, recently told CNBC, "This is the tightest labor market I’ve ever seen."

Your relatives may wonder, why is it their 401(k) is declining if the economy is humming?

Here's what you can tell them. The problem is not today's economy, it's the outlook for corporate profits.

Economic strength is leading to higher wages, higher interest rates and a higher dollar, all of which combine to indicate lower profit margins ahead.

Lower profit margins are a bearish catalyst, resulting in higher loan defaults, higher layoffs, and ultimately -- a higher probability of recession.

Whether we do or don't see an actual recession materialize in the U.S., slowing growth alone is sufficient to trigger technical reverberations across capital markets.

Where should I consider investing?

Everyone should invest according to their individual goals and objectives.

That said, if you haven't already trimmed risk from your portfolio, consider using rallies to do so. There is less incremental upside potential versus downside risk as compared to a few years ago.

I am not advocating a "sell everything and run for the hills" type of approach. Far from it.

In my view, everyone should have a risk range that is customized to their circumstances and psychology. Even though I am at the low-end of my risk range, I'm still invested. I'm still playing offense, but in a more conservative manner.

Here are several safe haven ideas that have held up well historically when growth was decelerating:

Cash or cash equivalents

High quality stocks (high profit, low leverage firms)

Sectors: Health care, REITs, consumer staples and utilities

In recent days, I started to spend down cash reserves to scoop up a few stocks I thought were at bargain levels. I know I won't perfectly time a market bottom. So I try to gradually buy on the way down as more opportunities appear. 

What about the trade war with China? 

If you're a soybean farmer or work in Maine's lobster industry, you are probably feeling a serious impact from the trade war.

But if you're an average, well-diversified investor, the impact is probably less severe than it appears, especially considering the amount of media attention the topic garners.

The weighted average tariff imposed by the four largest trading partners on U.S. exports is 6%. Meanwhile, the average tariff on imported goods to the U.S. from those countries is just 3.5%. So a 2.5% "unfairness" gap exists. 

If you quantify it, the gap amounts to a $40-to-$50-billion problem in a $87-trillion global economy. In other words, the trade war rhetoric is likely priced in.

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I'll leave you with an anecdote about a forecast. It's easy to remember, hard to refute, and always relevant.

Legend has it someone once asked John D. Rockefeller his market outlook. His response, "I expect it will fluctuate."

 

Originally published by Forbes. Reprinted with permission. 

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This material is not intended to be relied upon as a forecast, research or investment advice. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Silverlight Asset Management LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Silverlight Asset Management LLC, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.​