Quarterly Investment Commentary October, 2019Submitted by Harvest Asset Group | Fee-Only Financial Planner Portland ME on October 30th, 2019
Over the last three months we have experienced a lot of economic, political, and market uncertainty. Naturally, this has been accompanied by market volatility. While Q3 2019 investor returns were mostly flat by quarter end, there was a lot of movement during the quarter – most notably a plummet at the beginning of August. September brought about a recovery, but not a big one. Fortunately, for most investors the year to date returns remain healthy.
We are seeing a lot of news headlines notifying us that a recession is on the horizon. Unfortunately this information is neither news or helpful in any way to individual investors. Recessions occur periodically as a natural part of the economic cycle. In order to avoid experiencing short term losses from a recession requires getting the timing right on two major decision points – when to exit the market, and when to reenter.
Predicting economic turning points is particularly challenging. One humorous economist noted:
“The record of failure to predict recessions is virtually unblemished.”
And if economic cycles are difficult to predict, market cycles are next to impossible. Relative to macroeconomic indicators such as gross domestic product, employment, and inflation, the behavior of financial markets can be faster moving, noisier, more driven by investor emotions, and detached from economic fundamentals.
The combination of employing widely accepted risk management practices, and keeping a cool head during periods of fear and uncertainty is a powerful formula toward achieving your lifetime financial goals.
Today’s Economic Perspective
Recent trends in leading economic indicators are consistent with a slow but still expanding economy, which has been primarily driven by strong consumer spending and robust job growth.
Economic activity in the U.S. has cooled a bit, specifically in manufacturing and exports. But at the same time, we are experiencing the strongest labor market in several decades, with the pace of layoffs and the unemployment rate near a 50 year low. Economists are hardly in consensus, but many predict that the economy will continue growing to the end of the year at least.
Some of the uncertainty among investors is being driven by the presidential impeachment hearings, China trade tensions, middle-eastern developments, and a messy “Brexit” in Europe. But markets have also been very sensitive to remarks and actions by the Federal Reserve.
A trade truce between China and the U.S. would be a relief, but it would be only one piece of a larger set of events that need to come together. Getting the world back on a faster growth track will depend on an economic rebound in the domestic economies of China and Europe.
Conditions set by the Federal Reserve (Fed) remain supportive to business expansion. Policymakers voted twice this year to lower the federal-funds rate, first at the end of July and again in September (by 0.25% each time). Additional rate cuts are widely expected to come before year end.
If you look past the headlines to economic fundamentals, the economy is in reasonably good shape and appears to be in little danger of actually contracting anytime soon.
Today’s Market Perspective
Asset class performance was mixed during the third quarter:
- U.S. large cap stocks were the only positive performer in both the quarter (+1.53%) and the year (+20.56%)
- Developed international markets lagged relative to U.S. large caps in the third quarter (-1.71%) and are up YTD (+9.85%)
- Small companies lost in the quarter (-1.76%), and are up YTD (15.78%)
- Emerging markets had losses for the quarter of 5.11% but remain in the positive for the year
- Fixed income securities remain below long term averages
Stock prices are driven by corporate profits, which could come under pressure as key drivers of their recent expansion (falling interest rates, lower taxes, and wage savings) fade.
The future of markets is uncertain at the moment. But history has shown that bull markets tend to be longer and steeper than bear markets, which means that holding on tight in choppy times tends to be the winning strategy.
We recognize that this is easier said than done. As an investor, it can be challenging to stay focused on a disciplined investment strategy during times when headlines are scary and markets move dramatically in response to the daily news. This is not helped by those who compete for your attention and benefit by stoking fear. Don’t let the news and rhetoric be distractions to your financial resolve.
Our focus is helping clients by leading a discipline process to help identify opportunities applicable to your financial circumstances, and encourage actions which are beneficial. Our running hypothesis during all economic cycles is that the market can be expected to go up and down (dramatically and unpredictably) over the short run (less than 5 years), and up over the long run. We work with clients to help reduce the impact or short term market volatility and taxation while funding important life goals.
Given the current backdrop of uncertainty, now can be an ideal time to renew your commitment to a disciplined investment strategy that is integrated with the other elements of your financial plan.