The US economy is soft and many others around the globe are contracting due to lingering tariff issues between the US and China. Since the first threat of tariffs announced in January 2018, at which time the markets “shook” lower, each additional threat seemed to escalate anxiety and provoke the stock market to lower values. Their prolonged threat lowered US and global economic growth prospects because business leaders are stymied to make long term business decisions involving investments into plant and equipment, and/or hiring new employees. Making things worse, the Fed raised interest rates during 2018, appearing unaware or unconcerned that those actions would also slow economic growth prospects. That adds to “double trouble” for investors. “Quick, call the fire department.”
Despite persistent and worrisome headlines dominating the news flow all year, US Stocks enter the 4th quarter with their biggest YTD gains in more than two decades. In this quarter’s update, the article “September Crazy” discusses why the current bull market – which began 127 months ago and is now the longest in US history – could still advance further due to fundamentals and an anything-but-euphoric sentiment. “Big Fat Yields” (or the lack-thereof) shares several implications of low interest rates, the message from the yield curve, and the Fed’s likelihood to pursue additional cuts. The above themed titles taken together might also be a reason why the market leadership shifted abruptly in September; will we see the rotation wherein “Losers Win; Winners Lose” continue into the 4Q?
The newsletter also contains two brief Personal Finance themed notes: “Doing Diligence” and “Transitioning from a ‘Saver’ to a ‘Spender’ in Retirement” are related, but speak to the importance of discipline (be it with saving, investing, etc) as well as the emotional hurdles we observe for many individuals either at the doorsteps or in the early innings of retirement. These articles can be found posted separately.
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The current global trade war concern first emerged 18 months ago; as recent as May it was generally believed a US/China trade deal could be negotiated. That deal on paper was reportedly 80% complete. At the same time, some trade progress occurred elsewhere (USMCA/NAFTA 2.0), but the US/China negotiations are unfinished and appear virtually collapsed. One even wonders if a US/China deal can resolve before the next US presidential election in 2020. The reality is China does not feel the same political urgency and is unlikely to back down quickly, instead they favor projecting a tough image. That means more economic pain will probably occur before meaningful talks resume. A major issue – Intellectual properties protection – is a complex subject to be resolved. In essence, it appears we are in the throes of a “New Cold War” with potential big influences on the domestic and global economic and financial outlook.
It’s pretty easy to hear the same investment theme these days “as many investors go to the same dinner”; hear the same story; and drink the same Kool-Aid. The huge world of investible assets is quickly shrunk down to just a few of the same companies owned by many. But years of tepid economic expansion and low returns cause many investors to be hesitant to broaden their holdings beyond the few stocks delivering eye-catching results. This includes index ETFs (passive strategies) that own outsize exposure to the same fast growing companies. Even today as global growth is slow there is caution to invest otherwise despite a record widening valuation gap between growth and value stocks. Additionally, money flows are more concentrated and could exasperate market volatility and drawdown for these heavily owned exposures. Did you know, the FAANG stocks provided 25% of the YTD2019 return for the S&P500? [FAANG stocks = Facebook, Apple, Amazon, Netflix and Alphabet’s Google] Together they are a large portion of the S&P500’s total market capitalization, and their growth sizzled in recent years. Yet caution is warranted as they are priced to “perfection” – requiring close awareness to their rich valuations and being widely owned.
If you travel through the village of Mantua in northeast Ohio, don’t drive with a dog in your lap. Determined to stop distracted driving, the police are aggressively issuing tickets to curb behaviors such as driving with an animal sitting in your lap or texting. All around the world, new laws are being written to address distracted driving. It is also important to not let various happenings distract us from accomplishing important plans of life. That includes plans about your finances – financial planning and investing for the future. We all know from experience that life events can get in the way of advancing forward with best laid plans for the future. Nevertheless, keeping plans and goals in our foresight provides better chance to achieving them.
Four months of 2019 are in the history books and investors should be delighted, as January, February, March, and April were each positive performance experiences. The cumulative result is a total return exceeding +18% for the S&P500 index. That’s well ahead of the average January to April return of +3.7% over the past 25 years, and is an attractive return for most full years. A “4-peat” is rare, but not unprecedented with 2019 notching the 16th observation since 1950. The other 15 historical occurrences went on to provide an additional +10% average return for the final 8 months of the year, though there was usually a pullback (-8% on average) along the way. The S&P500 index added +4% during April boosting the strong 1Q returns. Client portfolios continued their advance, as both stocks and bonds provided positive returns.
Two months and so far, a very Happy New Year!!! February added +3.2% to a very strong January, making this a great start to 2019 for investors with the stock market jumping a cumulative +11.5%. Wow!! We appreciate the Fed again communicating economic data dependency rather than an autopilot path of raising interest rates, plus tariff talk between the US and China is showing promise of moving toward a resolution. These items are propelling markets higher.
Thank the Fed for the surge! The S&P500 posted its best January performance in 30 years (since 1989). Following a nasty 4th quarter and very difficult December which ruined the year, the Fed offered numerous reassurances in January that it was not inclined to make a policy error. Fed Chairman Powell shared that policy action would be more data dependent; rate increases and tightening monetary policy would not be on “auto pilot” in 2019; this was a stark difference from the tone conveyed in December. We believe January market action was mostly a reaction to a pause in rate hikes. It provided tremendous “fuel” for the strong rebound of +8.0% in the last month. Hey, that’s a bit stronger than the January 2018 performance start of +5.6%. Yet, there is one notable difference…last January, 51% of investors expected higher stock prices which did not materialize for the year; today, only 31% expect higher prices. Domestic and foreign stocks rebounded, and client portfolios benefited from the market boost in January (note the difference a month makes).
All the historical hype surrounding favorable mid-term election year investment returns is yet to materialize as we conclude 2018. Since 1950, every mid-term election (17 of them) resulted in strong end-of-year stock performance because the unknown of political change concluded. A different stock market stat, again since 1950, reflects that 75% of December returns are positive; that is the highest single month probability of upward performance for any of the 12 months (next highest is April at 71%, and November with 68% of the time being positive – see chart below). This year, the 4Q experience to-date seems stark opposite.
Shake or bake; not! Shake and/or Break is a fitting title for the frightful market action in October. Markets may “shake” because of tariffs. But, the Fed can cause the market “break.”
Much of the blame for October is aimed at President Trump and/or Federal Reserve Chairman Powell. Investors are concerned that the Fed remains inclined to raise interest rates further – 1 more hike in December, and presently communicates 3 additional times in 2019. There are even forecasts of one more rate increase planned in 2020. Investors are also concerned about tariffs because they are like a tax to American citizens. Both issues are viewed as punitive to economic growth over the next 12 months. Some wonder if the recent economic strength is “as good as it gets.” That suggests that economic and business growth will be shifting into slow expansion again (even though this expansion will become the longest running in US history next year). The economy is probably able to handle slow rising interest rates, to a point. But the stock market will show stress earlier, as witnessed by action in October. In essence, the market tone was altered due to these two concerns. Again, markets may “shake” because of tariffs; but markets could “break” because of the Fed.