Down This Road Before

Over the trailing twelve months the U.S. stock markets experienced three distinct corrections.  Each of these corrections were preceded by the major U.S. stock indices reaching new all-time highs. 

In the fourth quarter of 2018, a combination of higher short-term interest rates, hawkish comments from the Federal Reserve, a looming inverted yield curve, trade tensions between the U.S. and China, a government shutdown, slower global economic growth, falling oil prices and investor fear brought the S&P 500 down 13.5% for the quarter.  After a great start to the New Year, enter the May stock market correction.  This one month sell-off was somewhat self-induced as the U.S. turned up the heat on China with the threat of a new round of tariffs.  The threat became reality as the administration raised tariffs from 10% to 25% on $200 billion of China imports. The S&P 500 reacted with a 6.8% correction.  Corporate earnings and belief of multiple rate cuts became June and July’s rally cry.  August quickly became the third round in this mini correction cycle as the S&P 500 retreated 6.0% during the height of this month’s sell off.

The August setback actually began in the afternoon on the last trading day in July when the Fed cut the fed funds rate by 0.25% noting “global developments” and “muted inflation” as their rational.  In the post decision press conference, Fed Chairman Powell framed the cut as a “mid-cycle adjustment”.  Investors immediately interpreted this to be a one and done rate cut; they were expecting more.  If this wasn’t enough, the next morning the markets were greeted with a presidential tweet announcing a new round of 10% tariffs on the remaining $300 billion of Chinese imports effective on September 1st.  This one-two punch sent the market into a violent tailspin.  The fallout in global stock prices sent gold prices higher in a typical flight to safety trade, and global interest rates went into a freefall causing bond prices to rise.   

On the economic front, the news was not so dire.  The July employment numbers released by the U.S. Department of Labor showed 164,000 jobs created.  The headline jobless rate held steady at 3.7%.  Monthly job growth has averaged 140,000 over the past three months, 47,000 lower than the 2018 average.  Retail sales surged in July as did durable goods orders.  Lower mortgage rates are beginning to revive the weakening housing market.  On the flip side, we saw a slump in industrial production, a rise in import prices and some softening in very strong consumer confidence numbers. 

Stocks around the globe gave way to multiple pressure points.  The combination of falling interest rates, negative interest rates, inverted yield curves, trade wars, tariffs, Hong Kong protests, central banks, Brexit, geopolitical risk and fears of recession collectively brought global stock markets down.  When the dust settled at month end, the Dow Jones Industrial Average, NASDAQ Composite, and the S&P 500 lost 1.32%, 2.46%, and 1.58%, respectively, in August.  International stocks continued to reflect economic uncertainty as the MSCI EFAE and emerging markets indices declined 2.59% and 4.88%, respectively. 

Interest rates and the shape of the yield curve made front page headlines in August.  An inverted yield curve has become the poster child for signaling the next recession.  In August, we had the first inversion between the 2-year Treasury and the 10-year Treasury note.  Recession fears and a flight to quality trade sent global interest rates to zero and in some countries well into negative territory.  In the U.S., the 2-year Treasury note yield fell 39 basis points to end August yielding 1.50%.  With the fed funds rate now pegged at 2.00%, it’s obvious the market is still calling for multiple future Fed rate cuts yet this year.  The bottom fell out on longer term yields as the 10-year and 30-year Treasury securities declined a mind boggling 52 and 57 basis points respectively bringing their yields to 1.50% and 1.96%.      

The August downturn and spike in market volatility can be emotionally unsettling for most investors.  This is an appropriate time to rise above the current headlines and assess your financial plan in the context of your long-term financial goals.  Today the market is worried about a slowing economy, an inverted yield curve, recession and a 10-year bull market in stocks coming to an end.  The focus of your concerns should not be directed at the market, but rather on your own financial plan.  The key questions to ask yourself are:

  • Am I invested at an appropriate level of risk?
  • Is my asset allocation in sync with my long-term financial goals?
  • Does my portfolio have proper diversification?
  • Will the plan meet my income needs over time?
  • Does my plan keep me ahead of inflation?

The market is not under your control.  Your financial plan is under your control.  Don’t let the market take control of your financial plan.  When the going gets tough, like it did during the last three corrections, stay true to your plan.  Stay invested at a risk tolerance designed for your situation and avoid the common pitfalls.  Do not allow the market to take control of your financial plan.  


To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on September 5, 2019 Read More

The Search For Yield Is On Again

As we progress through 2019, one of the predominant themes has been the dramatic reduction in interest rates across the globe.  While interest rate cuts are meant as an elixir to struggling economies, it also has the effect of lowering rates of return for bonds and other safe assets.  As a result, many investors are left with questions on how to generate income in their portfolios while staying within their personal risk profile. 

In the US, interest rates have been declining precipitously.  Per the chart below, US 10-year treasury rates have decreased from a recent high of 3.22% on November 2, 2018 to 1.55% on August 16, 2019. 

Further, August 14, 2019 saw the 30-year US treasury hit an all-time low yield of 2.06%, per

When US rates are declining aggressively, it makes existing bonds more valuable (as they are paying higher than current market rates) but creates lower return for new bond investors (or those that are reinvesting proceeds from matured bonds).  A perfectly suitable alternative, historically, was to look to international bond markets for potentially greater yield.  At this time, however, many international markets are paying NEGATIVE YIELDS, which means that you will receive less money at maturity than you are investing today.  The chart below, from JP Morgan, shows the current yields for government bonds for several different countries. The bonds highlighted in red currently have negative yields:  

A logical question is why anyone would invest in a negative yielding bond.  The answer is that speculators buy these bonds as they expect rates to go lower, thus making their negative yielding bond more valuable in the short term.  In our opinion, this is a dangerous game that does not seem sustainable over the long term.  So, for investors looking for additional income in a low/negative yield world, here are some of our suggestions for alternatives:

  • Dividend paying stocks: Our G50 and G40i portfolios are currently generating above 3% per year in dividend income.  Further, the companies we invest in are healthy companies with long term track records of paying, and increasing, their dividends.  This dividend increase is a powerful force to offset the effects of inflation and provide a greater amount of income over time.
  • Alternative income assets: Alternative assets that lie outside traditional stocks and bonds are investments such as REITs, preferred stocks, and senior bank loans.  These assets are generally higher risk than traditional bonds but offer a higher recurring income source.  Our Absolute Yield portfolio is a terrific example of a diversified asset allocation strategy that invests in high income assets and is currently yielding over 5%.

Overall, if investors want additional income in the current market, they will have to accept higher risks.  We would not expect a lot of return from traditional bonds at current levels, but they still have a place in client portfolios as a means of risk reduction.  US treasury and US corporate bonds, despite the recent collapse in interest rates, still provide positive relative income and can offset volatility from riskier investments. 

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on August 21, 2019 Read More

Onward and Upward

The third quarter began in bullish fashion as the most of the major stock benchmarks jumped by 1.5% or more in the first week of July.  A key catalyst for this quick start was the Department of Labor’s June jobs report that said the U.S. economy added 224,000 net new jobs, 60,000 more jobs than most forecasts predicted.  The headline jobless rated moved 0.1% higher to 3.7% in June, but the employment numbers remain strong across the board and are keeping consumers in good shape. 

Retail sales reported in July for June’s activity were up 0.4%, which exceeded expectations.  This is meaningful as consumer purchases represent two-thirds of our Gross Domestic Product (GDP).  The second quarter delivered 2.1% GDP growth, slightly above the 2.0% expectation.  While this is weakest print in over two years, the decline was mainly a result of a decrease in business investment.  Consumer spending increased 4.3% and government spending jumped 5.0%.

On the last trading day of the month the stock market gave back some of the first week’s strong gains.  Through previous statements and testimony, the Federal Reserve chairman had opened the door to future interest rate cuts.  The economic sluggishness elsewhere around the globe has caused the Fed to rethink their current fed funds rate target.  In the final trading hours of July, the Federal Reserve announced their first interest rate cut in over ten years.  The 25 basis point cut along with post decision comments by Chairman Powell disappointed market expectations causing a one day stock price correction. Now all eyes turn to the employment numbers to be released on August 2nd.

The recipe for this strong economy includes more people employed, consumers willing and able to spend, and corporations’ ability to earn money and grow profits.  July 15th marked the beginning of another round of quarterly corporate earnings announcements.  More will be known by mid-August, but the early news looks positive on the corporate earnings front as 77% of those reporting have exceeded expectations.  As is the case each quarter, there are individual companies that exceed expectations and those that fall short.  On the positive side, money center banks had a good quarter, some technology companies like Alphabet, Intel and Twitter exceeded forecasts while Amazon, Caterpillar and some of the smaller airlines disappointed.  Consumer favorites like McDonalds, Costco, Starbucks and Coca-Cola found their way to new 52-week high stock prices on very strong quarterly results.

While background noise can be distracting, it is important to identify and understand the signal in the headlines.  Tariffs are likely here to stay for the foreseeable future, yet the markets continue to react to the latest threats and realities.  Tariffs on Mexican imports appear to be off the table for now.  After the June G20 meeting, China is back to the negotiating table, but they seem content to be very deliberate with their discussions and may wait it out until the next election cycle.  France may be the next tariff target as they plan to institute a new digital tax on certain U.S. technology firms.

Be aware of your total surroundings but remain keenly focused on the U.S. consumer and corporate profits as those tend to be better indicators of long-term economic health.

U.S. stocks have once again found their way to higher highs.  The S&P 500 cracked the 3,000 level and the Dow Jones Industrial saw 27,000 for the first time this month.  The strong economy, low interest rates, benign inflation, corporate earnings growth and an accommodative Fed have set the stage for this remarkable run in the financial markets.  The Dow Jones Industrial Average, NASDAQ Composite, S&P 500 and the gained 1.12%, 2.15%, and 1.44% respectively in July.  International stocks continued to lag the U.S. as the MSCI EFAE and emerging markets indices declined -1.27% and -1.22% respectively.  

Bond performance is exceeding all expectations at this point in the year and looks likely to hold from here.  Low inflation and continued moderate growth should keep interest rates in a tight trading range.  This month interest rates ticked up slightly after a strong rally into mid-year. The 2-Year Treasury note yield rose 14 basis points to end July yielding 1.89%.  With the fed funds rate now pegged at 2.25%, it’s obvious the market is still calling for another future Fed rate cut.  Yields also increased marginally on both 10-year and 30-Year Treasury securities bringing their yield to 2.02% and 2.53% respectively.  

We would encourage investors and advisers alike to concentrate on asset allocation and portfolio rebalancing and less on absolute market levels and emotions.  Yes, it is true the U.S. stock markets are trading near all-time highs and interest rates remain stubbornly low.   This statement was true a year ago and may still be true a year from now, we just don’t know.  Instead of falling victim to the next bearish viewpoint you read or hear, take this opportunity to rebalance your portfolio back to your targeted risk tolerance.  For example, if three years ago it was determined that 60% stocks and 40% bonds was the asset allocation best suited for your situation and asset appreciation now has your portfolio at 66% stocks and 34% bonds – it’s time to rebalance.  Use this strong market as an opportunity to reduce stocks by 6% and add 6% to bonds, thus returning your portfolio to the original 60/40 allocation target. 

Also, it is important to avoid the temptation to “go to cash” when you read the next well-written “end of the world” piece.  Investing is a marathon, not a sprint.  Enjoy the run, breathe, and stay invested at a risk tolerance appropriate for your situation.    


To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on August 12, 2019 Read More
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