Q2 2019 Investment Commentary
Authors: Jason Coleman and Sam Maness, JD CFP®
The past six months have provided a great deal of drama and some excellent lessons for the long-term investor. After 2017 delivered strong equity returns globally, many started 2018 with broad optimism for the markets – everyone was talking about growth prospects and strong economic fundamentals. Of course, a good economy doesn’t always mean rising stock prices. In fact, the quality of an economy – in terms of growth in GDP, company earnings, or unemployment - can often be a “lagging indicator” of stock prices. This means that the good economic news is often already priced in to the markets, well before it ever hits the news cycle.
Later in 2018, more people started to question the price of equities – particularly here in the United States, where tech companies and other growth stocks kept pushing the broader market to new heights. There were other factors making investors cautious as well – trade conflicts with China, political uncertainty, and rising interest rates, among others. TV and online commentators always like to point to a single reason for stock market movements, but it is rarely if ever that simple. The market often moves in reaction to a host of factors, and at times for no reason at all. But for whatever reason, stocks started declining during the fourth quarter of 2018, and in a dramatic fashion.
In December, we hosted a conference call for investors and also provided a written update, outside of our usual quarterly newsletter format. In short, we advised that for most of our clients, staying the course remained the best course. Looking back, this advice appears sound. In the first quarter of 2019, both domestic and international markets are up close to double digits, and portfolios have recouped most - if not all - of the losses from last year.
All of this recent activity serves as a microcosm of the typical stock market cycle, with all the highs and lows – although we’ve witnessed in six months what generally takes six or more years! We saw (1) broad investor confidence and rising prices, (2) followed by unexpected and abrupt declines, which in turn created (3) a media shift to pessimism, suggesting a new recession, followed by (4) a quick recovery, and (5) renewed optimism from media and professionals. In recent weeks, you could even add (6) renewed pessimism sparked by the “inverted” yield curve, which occurs when short-term bond rates are higher than the 10-year treasury rate, and is often cited as a leading indicator for a future recession.
So, are we in the clear? Of course not. The investing universe is a continuously changing place, and before the ink on this note dries, it will likely look different. What happens next is uncertain, but in the past few months we’ve learned the lessons of another cycle, and those lessons seem to repeat themselves regardless of the market’s trajectory: (1) investing is emotional, (2) risk never goes away, and (3) investment returns require patience in the face of adversity.
Strategically, the team here continues to monitor the portfolio strategy and make adjustments when appropriate. Often doing nothing is the best course of action, but last year, prior to Q4 equity volatility, we exited “floating rate” bank loans – a security type best suited for a rising interest rate environment – and moved investors to more plain-vanilla government securities that have been out of vogue for some time. The bond market rallied in December and more professional commentators have started questioning the appropriateness of riskier floating rate loans, reinforcing our conviction in the shift we made.
What else do we know? We know that growth in the US remains positive, though slowing. The 4th quarter estimates of 2.6% GDP growth shows us that the economic “adrenaline shot” received from the tax cuts is starting to fade. European growth remains slow, but positive. Inflation hovers around 2%, and the Federal Reserve has shifted from a hawkish to a dovish stance, which the markets have taken as supportive. Concern about China’s “shadow banking” continue to grab headlines and our China exposure is an ongoing topic of conversation among the team here.
In this quarter’s financial news, we expect to see a lot of coverage of the upcoming “Unicorn” IPOs. Lyft, Uber, Palantir and others are moving aggressively to access the public capital markets and there is much fanfare accompanying them. If you’d like to discuss more, please give us a call. The opportunities may be real, but its always important to buy and not to be sold.
In these notes, we focus on investments, talking about the markets and how investors can build wealth or preserve capital. But our broader focus will always look beyond stocks and bonds to how we can serve you and your family. We know that the family financial plan often includes many intangibles that don’t show up on the balance sheet: providing opportunities for loved one, giving back to the community, and a healthy & personally rewarding retirement. We know your legacy is as much about how you live as about what you leave behind, and we are here to help bring those goals to fruition.
We look forward to seeing you soon.
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The returns of various indexes are provided as benchmarks for comparison purposes. Consult your financial representative for specific details regarding the benchmark used as a comparison in the report. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect investment performance. Individual investor's results will vary.
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks and is generally considered representative of the U.S. stock market. The MSCI EAFE is a free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. The EAFE consists of the country indices of 21 developed nations. The Barclays Capital
Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody's Investors Service, Standard & Poor's, or Fitch Investor's Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices. The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected.