“The stock market is a device to transfer money from the impatient to the patient.” - Warren Buffet
We hope all is well with you and your family and that you are enjoying autumn! The third quarter of 2019 turned out to be just as volatile as the previous quarter, albeit with different overall performance results. Domestic equities returned +1.28% for the period with value oriented stocks outperforming their growth counterparts by more than +3.5%. This signifies the benefits of diversification to different and, in some cases, less “popular” asset classes. The table below summarizes the performance of various domestic equity categories over the past 3- and 9-month periods.
Developed and emerging market stock returns were less than their U.S. counterparts with performance results of -1.12% and -3.57%, respectively, for the quarter. This is not surprising given the declining growth rates outside of the U.S. and more significant effects of trade tensions on foreign countries. Source: Morningstar
The fixed income sector (e.g. bonds) continued to perform “as expected” in times of market volatility. The return on the Barclays U.S. Aggregate Bond Index, one of the most common benchmarks for domestic fixed income holdings, was +2.27% in the third quarter of the year. We continue to think of allocations to fixed income as a “buffer” in our clients’ portfolios and prefer holdings of higher investment quality and short and intermediate maturities. Most of the market volatility we experienced in the third quarter of the year can be attributed to the continued trade tensions with China. There were multiple attempts to move the negotiations in the positive direction which ultimately resulted in limited to even negative outcomes. The markets prefer stability and relative predictability of major decision makers around the world. There is a wide range of potential outcomes and we will continue to watch and analyze any further developments as they arise. The best course of action is to be fully prepared for any outcome by adjusting your overall asset allocation to the mix that is comfortable for your specific risk tolerance and expected cash needs. The chart below summarizes the timeline of tariffs imposed by U.S and China.
The Federal Reserve’s decision to reduce interest rates by 0.25% in September was not surprising and was anticipated by most market participants (current range 1.75% to 2.00%). What was more interesting is the difference in opinion of future “appropriate” rate adjustment expressed by the Fed officials. Eight out of 17 directors believe that interest rates should fall to 1.50% to 1.75% by the end of 2019 and remain at this level in 2020. In contrast to this opinion, six out of 17 believe the range should be higher than what it is today. The chart on the following page summarizes the shift and difference of opinions as of September, 2019.
We continue to believe that interest rates are more likely to decline even further in the near future, potentially in the 4th quarter of 2019. Interest rates in the U.S. are some of the highest for developed economies which makes domestic exporters less competitive (interest rate on short-term government bonds in Germany and Japan are negative). We have already adjusted the fixed income allocations in most of the managed portfolios to reflect this view.
Source: Federal Reserve Board, Barron's
We are often asked about our perspective on the current market volatility and our future expectations. As noted earlier, the outcome of the trade negotiations will most likely have a significant impact on the direction of the market. Even though many of the economic indicators remain positive (domestic GDP growth of 2%, inflation of only 1.7% and record low unemployment rate of 3.7%) we are in the 11th year of the current market expansion. Higher levels of volatility are common in the late expansion stage of the business cycle (see the following page for additional information). We strongly encourage everyone who is not comfortable with the current market fluctuations to reach out to discuss. There are many ways to address your concerns from both portfolio and cash flow perspectives.
Source: Federal Reserve Board, Barron's
There are many financial planning and tax planning ideas that we usually discuss with our clients as part of our year-end planning conversations. Depending on the direction of the markets, we would consider harvesting investment losses for tax purposes. This strategy applies to taxable accounts that we manage. For those of you with charitable intent, consider the benefits of Donor Advised Funds (DAF). This approach allows you to transfer cash or appreciated securities into the fund and receive the tax deduction for the entire amount in the year of contribution. There are no limitations on the timing of distributions to specific charities in the future. An alternative approach for those who invest in Traditional IRA and are required to take a minimum distribution (RMD) is to direct a portion or the entire distribution to charities. Any amount up to $100,000 distributed this way would not be taxable to the account holder. We would be happy to discuss these or any other year-end strategies with you.
As always, feel free to reach out to us and we will gladly assist you.