New Record Highs Amidst Caution

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Record! The U.S. Women’s soccer team “ran the table” again, pulling in their fourth World Cup, a record number of wins.  The team was exciting to follow, not just due to the team captain’s pink hair!  Perhaps the U.S. stock market was cheering our women’s soccer team in advance as the Dow posted a record high on July 3 of 26,996.  Key factors include the resumed trade negotiations with China and expectations that the Federal Reserve will reduce interest rates. 

Chinese Trade Negotiations.  At the recent G-20 Summit, President Trump and the Chinese President Xi Jimping came to a minor trade “truce,” with the U.S. agreeing to delay increased tariffs and also easing restrictions on the Chinese company, Huawei. However, key issues are outstanding.

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Potential Interest Rate Decreases. The Federal Reserve has signaled that there could be upcoming interest rate cuts if economic conditions continue to weaken. Interest rate decreases make it cheaper for people and companies to borrow, increasing spending, and, therefore, economic activity. 

Caution.  The stock market is ten years into this upswing, but the longevity of an upswing does not, in and of itself, create the next downturn.  As an example, Australia is in its 28th year of upswing. 

But conditions bear watching:

  • To give you a sense of recent volatility and how quickly things can change, the Dow posted -7% recently from April 23rd to June 3, and -20% from Oct 3 to Dec. 24, 2018.

  • The trade war doesn’t currently appear to have an end in sight. Ed Mills, a Managing Director for Raymond James, believes that, “fighting China in trade is easier for Trump to defend than a weak deal, increasing the likelihood this fight lasts beyond the 2020 election.” We expect continuing stock market volatility during the back and forth trade negotiations.

  • Of course, interest rates are already low. Therefore, the Federal Reserve does not have endless “room” in this area.

  • Investor sentiment leans in the direction that current conditions are likely better than future conditions, per a technical measure called the “inverted yield curve” (see definition on last page). An inverted yield curve is an aberration from the norm and has occurred twice in the last year.  This aberration has occurred before each of the last seven recessions, and two times more. In other words, it is not a fool proof indicator, but is well worth considering.

Bond Markets.  Since the beginning of 2019, the expectation of reduced interest rates has helped many types of bonds rise in value.  

Commodities.  This investment category includes hard assets such as gold.  Some time ago, we recommended a small position in gold for many clients due both to its long-term potential return combined with its risk management benefits.  In terms of risk management, during the Dow’s recent -7% downturn gold (symbol GLD) increased approximately 4%.  In addition, it is up 9.8% for the year, supported by expectations of falling interest rates.

Putting it All Together.  If you have read this far, we are grateful!  We know that we’ve been covering a lot of technical information. And, of course, there are many more variables at work beyond those discussed above.  

Here is our bottom line:  we give recession and a bear market in 2019 only a 25% risk, but see that risk increasing to 35% in 2020, and growing from there.  However, bear markets, though unpleasant, are NOT the end of the story.  After the next bear market, we expect the next upswing.  

Two key factors in making good decisions during market up and down cycles include:

  • Having a strategy that fits you, that both supports you in meeting your goals and matches your preferences for the trade offs between return and risk, cash availability, etc.

  • Partnering with us to “look under the hood” during up and down markets to avoid over exuberance during exciting times and too much pessimism during concerning times.  Many investors whom I’ve counseled as a volunteer telephone bank resource tend to look at their 401(k) account or investment statements and say, “that fund is up, I’ll buy more,” and “that one’s down, so I’ll sell it.”  This type of decision making can be the opposite of buying low and selling high, i.e., the opposite of being a contrarian.  And, of course, these folks may be making these problematic decisions due to lack of a trusted partner or trusted advice.  

    • Research by Vanguard and Russell (founder of the Russell 1000, 2000, and 3000 indices) indicates that a trusted partner who can support you toward the right contrarian investment moves during market peaks and downturns may add value of approximately 1.5% (Vanguard) and 2% (Russell) per year.(1)

Office News. Tom recently lost his beloved 91-year-old father, John Kuntz, who passed away peacefully.  

Our team attended educational sessions on Paying for College and Socially-Responsible Investing.  Mallory and Laura were asked to present “Client Well-Being After Divorce” to family law attorneys and other divorce professionals both in person and via webcast – we enjoyed being on TV!

You’ll find free resources that may help you or others. Check out our videos and checklists on wealth preservation & growth, loss of a loved one, or divorce.

As always, please let us know your comments and questions. 

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Disclosures

A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.

Definitions

Inverted Yield Curve: When the yield for bonds with less time to maturity are greater than the yield for bonds with more time to maturity. This is viewed as inverted because the standard yield curve will have an increase in yield with the more time to maturity (bonds with less time to maturity would have a lower yield than bonds with more time to maturity). This is a general concept that can be applied to all bonds with differing time frames, but the comparison usually associated with the inverted yield curve is the yield of 2-year treasuries and the yield of 10-year treasuries.

Dow Jones Industrial Average: The Dow Jones Industrial Average is a composite of 30 stocks spread among a wide variety of industries, such as financial services, industrials, consumer services, technology, health care, oil & gas, consumer goods, telecommunications, and basic materials. The index is price weighted (component weightings are affected by changes in the stocks’ prices).

U.S. Commodities: The index measures the performance of future contracts on physical commodities which traded on US exchanges and London Metal Exchange. The commodity weightings are based on production and liquidity, subject to weighting restrictions applied annually.

S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested.

MSCI EAFE (Europe, Australasia, Far East) Index: A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. As of June 2, 2014, the index consists of 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

Barclays Aggregate Bond: A representation of SEC-registered, taxable, and dollar denominated securities. The index covers the U.S. investment grade fixed rate bond market, with index components for asset-backed securities, government and corporate securities, and mortgage pass-through securities. Must be rated investment grade (Baa3/BBB- or higher) by at least two of the following rating agencies: Moody’s, S&P, Fitch; regardless of call features have at least one year to final maturity, and have an outstanding par value amount of at least $250 million.

Bloomberg Barclays U.S. 1-3 Year Treasury Bond Index: Measures the performance of the U.S. government bond market and includes public obligations of the U.S. Treasury with a maturity between 1 and up to (but not including) 3 years.

Footnotes

(1) Estimated Value from Various Financial Planning Activities,” Morningstar, in article entitled, “The Value of a Gamma-Efficient Portfolio,” Oct 25, 2017.

Important information

The information on this and the previous page is not intended as a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice.  This information is not intended for a solicitation or an offer to buy or sell any security referred to herein.  Investments mentioned may not be suitable for every investor.  Investing involves risk and investors may incur a profit or a loss, including the loss of all principal.  Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. This may result in greater share price volatility. These risks are heightened in emerging markets. Diversification does not assure profit or protection against loss.  Bond prices and yields are subject to change based upon market conditions and availability.  If bonds are sold prior to maturity, you may receive more or less than your initial investment.  Holding bonds to term allows redemption at par value.  Bond prices and interest rates have an inverse relationship. Dividends are not guaranteed and must be authorized by the company’s board of directors. The Bloomberg Commodity Index is composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying physical commodity. In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as "rolling" a futures position. Market performance results were obtained from Morningstar.com.