3rd Quarter 2019 Investment Review

 

 

Dear clients and friends,

With the 3rd quarter behind us, I wanted to provide an update on the capital markets and our current strategy.

2019 has been a strong year in the market following a difficult end to 2018. In 2018, the S&P 500 was up 9.4% at its peak on October 3rd. By December 31st, the entire gain evaporated and the S&P ended up down -6.24% for the year. Year-to-date, the S&P is up 18.7% but has been punctuated with volatility in May and August and concerns about a slowing global economy.

Current economic data is mixed with global economic weakness being offset by the strength of the US economy. Approximately 70% of US GDP is generated by consumer spending and with an exceptionally strong job market consumers are continuing to fuel the economy. At the same time, there are a number of warning signs that suggest the 10 year global expansion may be approaching a turning point.

The US/China trade war and seemingly endless Brexit negotiations have disrupted manufacturing (Germany is near recession, China has suffered due to tariffs, etc.) and global trade has been bottlenecked. Central banks including the US Fed and European Central Bank are attempting to smooth out trade volatility by lowering interest rates and restarting quantitative easing. Global bond yields have declined to historic lows with approximately $17 trillion invested in negative yielding debt including the government bonds of Germany, France, Italy and Japan. In other words, investors are “paying” to own bonds, most likely due to a decline in economic growth expectations.

As a result of the strong US dollar and mildly positive interest rates, US treasury bonds have attracted global money flows. The US treasury yield curve has inverted with short-term interest rates higher than longer–term rates. Historically, an inverted yield curve is a harbinger of an upcoming recession. The last yield curve inversion occurred during 2006 and was followed by the Great Recession starting late 2007. While it’s possible the yield curve inversion is incorrectly forecasting recession it has a perfect track record over the last several recessions and we’re watching this closely.

As the 3rd quartered ended with the talk of impeachment of President Trump and the upcoming 2020 presidential election, a new period of uncertainty and rising volatility appears to lie ahead. As President Trump’s re-election hinges on a strong economy and stock market, the state of the economy will likely be a political battleground. Impeachment could undermine investor confidence further.

While the global economy may shake off the current doldrums, from my perspective there’s more peril than opportunity. Stocks are near all-time highs in a deteriorating economic environment. From a technical perspective, the market is showing signs it may be topping out. The bull case for stocks is that investors have few options. Money market and savings accounts earn virtually no interest and bonds are low yielding/high priced. Thus, bulls say stocks are the only alternative. That’s a valid argument but when investor confidence declines, all bets are off.

Based on current economic and market conditions, we’ve adjusted portfolios accordingly. During the 2nd quarter, we reduced equity positions and increased short-term bond positions (consisting primarily of US treasuries) and money market funds. We’ve maintained core positions in dividend-paying stocks, mid cap stocks, and technology and industrial stocks for the time being. Many of our portfolios are now relatively market-neutral as we await further developments.While not all of this may apply to your personal investment portfolio, this provides a general overview of our investment strategy.

Thank you for your continued confidence and support. Should you wish to discuss any of the above in greater detail, please do not hesitate to contact me at (516) 439-5525.

Best Regards,

Matt Blank, CFP®

Please note that investment comments are intended to be informative and general in nature, do not constitute an offering of any security, may not be predictive of future results and have not been tailored to the specific investment objectives of any one individual.

All market performance info as of 2019 www.stockcharts.com data.