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Market Commentary- September 30th 2018

The Bigger Picture –“It’s not just about the Economy”

It can be very confusing right now.  It seems we constantly hear that the stock market has hit a new high and the unemployment rate is at historic lows. The US economy is strong, Amazon and Apple stocks always seem to be going up and the same with Netflix.  With all this going on and the 2018 tax cut, why aren’t my investments doing better?  They would be if you invested all your money in the few stocks mentioned above (not generally a good idea, by the way).  But news outlets like everything else often promote what grabs people’s interest, not the whole story.  So, when you see below that the S&P 500 stock index was up over 10% this year through September, it doesn’t say that without the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google), the index would be negative for the year.  Or even if you invested an equal amount in all 500 stocks of the index including the FAANG stocks, you would only have been up 2.65%.  Also, while it may sound good that the “dollar is gaining strength”, that hurts investments in companies outside the U.S., so international stocks have suffered from this as well as impacts from tariffs.

And that’s just the stock market.  Investors Bond portfolios have struggled this year as the Federal Reserve is trying to restore interest rates to more normal levels.  And international bonds returns have also been affected by the impact of a stronger dollar.

Bottom line.  With low interest rates and an improving economy for the past few years, investors have enjoyed excellent returns, and now it’s not just about the economy.  Yes, the markets seem to be taking a breather to see if companies can keep growing, but also, we’re watching to see what central banks both in the U.S. and abroad are doing to stimulate or reign in growth, and what Governments are doing to appease their people through increasing or decreasing regulation or supporting or reducing tariffs.  Markets tend to react daily on what we think “might happen” in all these areas and can create some anxiety.  So, as I grew up hearing a lot — “calm down, remember the pendulum swings both ways”.

 

Major Indexes (year-to-date through June 30, 2018):             Representative Result of index returns:

YTD        QTD                                                                                  YTD       QTD.

S&P 500 (with dividends)                10.37%       7.65%                 Blackrock Growth Allocation            1.67%     .58%

All Country World Index -Ex US      -3.07%       .93%                Blackrock Moderate Allocation            .80%   1.73%

Global Bond Index                               -2.16%    -0.81%                Blackrock Conservative Allocation      .24%  1.37%

Gold                                                          -8.81%    -4.96%

The current situation:

Not much has changed since my June 30th commentary where I said “With news feeds following every Fed announcement, presidential tweet, and now seemingly every foreign leader’s statements, we either

 

 

 

think the US and Global economy is righting itself and ready to take its next leap forward or a global recession is just around the corner”.   Actually, we have improved somewhat in the most recent quarter through September 30th, as benchmark returns have moved from slightly negative to slightly positive.  But again, to this point, whether you have invested conservatively, moderately or aggressively, most diversified portfolios have not resulted in significant differences with aggressive and conservative benchmark returns within 2% of each other.  And not much above the break-even point. The strengthening of the dollar versus other currencies has been a big drag to international stocks in the 3rd quarter but has leveled off some currently and US interest rates continue to be on an upward path as our economy and unemployment seem to be very strong.

So, while “how much” the U.S. stock market can grow is at question as the Federal Reserve really wants to normalize interest rates, the overall economy appears stable.  International markets however still are presenting risks to investments there and somewhat to the U.S. as they impact global trade and US companies trade globally. Trade agreements with our neighbors Mexico and Canada have stabilized, though they haven’t passed congress yet, but in Europe, how England’s split from the European Union (Brexit) gets resolved and how Italy resolves its economic issues and general political unease points to potential problems.

The Federal Reserve is still on track to increase interest rates making US fixed income investments problematic and foreign governments continue support their currency in order to make their goods cheaper and more attractive to others.  This will maintain headwinds for both foreign stocks and bonds.    The trade skirmish / war with China gives no sign of abating which causes skittishness for business and individuals alike. The question remains will the current trend of a strengthening US economy and dollar continue and will trade problems settle down or will global uncertainty and increasing corporate debt derail the progress made in 2017.  Signs of wage growth and increased corporate investment are beginning to show up, but remain fragile and tied to business expectations which will be impacted by decisions around Europe and China.

 

What to do now.

Our firm goal has always been to “protect against large downside losses while participating in upward moves in the market”.  This doesn’t mean you will avoid discomfort in the inevitable “corrections” to the long running strong market, but they need to be managed. This is clearly a time to focus on that idea.  Economic data in the U.S. gives us hope that our economy is strong and businesses are making new investments.  So, if external issues around trade get resolved, it’s important to be part of pent up growth.  But if global issues don’t get resolved, an investor needs to have a strong reserve of patience.  It’s easy to be self-assured in a growth market and in fear of another 2008 when corrections start, but usually we’re fighting common sense moves along the way.  So, as they say, “hope for the best but prepare for the worst”.  In other words, maybe take a more conservative bent in these uncertain times, but don’t run for the exits as the US economy seems to be doing well and should handle existing hurdles.

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