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3rd Quarter 2019 Market Update


  • The range of outcomes in the stock market in the short term are wide, thus creating uncertainty and confusion among advisors and their clients.
  • From a long-term perspective, the S&P 500 is still in a bull market, however, most other indexes such as small-caps, international, and emerging markets remain in correction that’s lasted for at least 18-months.
  • Bonds have outperformed the S&P 500 have outperformed over the previous 12 months, but risks to holding bonds may now be high and this places the traditional 60/40 portfolio in a potentially bad spot going forward.
  • Value stocks have taken some positive steps towards regaining favor over growth stocks, but it’s still too early to call the growth bull market over.

3rd Quarter Highlights - What do I need to know?

  • Markets were mostly flat, to down for the quarter

Technical Market Assessment: 

  • Below is our Long-Term market indicator that takes 20 technical factors into account and through a statistical process creates an overall score.  The current reading of 68.75 indicates that we still in a bull market and need to remain positive on equities, or at least those large cap stocks. 

Big Picture on Markets: 

  • The S&P 500 has made little headway since January 2018 with volatility and large price swings in-between.

  • However, developed market stocks are well under performing the Large Cap U.S. counterpart S&P 500

  • Small Caps have been range-bound since late 2017

What are the Important Points I need to know?

Clients may want to anchor and compare their performance to the year-to-date performance of the S&P 500 but this likely is misleading

  • The S&P 500 closed the quarter just 3% below its July 18th, 2019 all-time high However, even the S&P 500 has made little headway since January 2018.
  • What about other areas of the market – How are they doing?
    • Small Caps (IWM) - are down 14% from all-time highs, Flat for the past 2 years.
    • European Stocks (IEUR) - down 17% from all-time highs, flat for past 30 months.
    • Emerging markets (EEM) - down 21% from all-time highs, flat also for past 30 months.

Other than the Largest U.S. Stocks – What Sectors are working?

  • Sectors tied to lower rates: Real Estate and Utilities

  • Software stocks that have high earnings growth and low connection to tariffs:
  • Investments that trade on fear like Gold. Note that this is a shorter-term trend driven by global monetary concerns and current news cycle.

  • Value vs Growth: The chart below shows the ratio of value to growth the past 5 years and illustrates the strength that growth stocks have had over value. Will value return or is the economy just different now?
  • Treasury Bonds: Investors worldwide are no longer buying bonds for yield and income, rather for capital appreciation.  This makes for a dangerous setup and it’s retirees who may pay the price.

  •  U.S. Dollar. Due to a shortage of dollars worldwide and other countries being much aggressive in cutting rates the U.S. Dollar is surging.

Advisor Takeaways

  • Clients may benchmark to the S&P 500 and individual client performance may be dramatically different depending on one’s allocations to the winners and losers. Keep your clients focused on why diversification to asset classes, sectors, and factors like value and growth still make sense over the long term.  While the S&P 500 may be within a few percent of all-time highs, many indexes such as small caps and international investments are down over the last 2 years. There may be an opportunity to maintain or add positions to these laggards. 
  • Risks to Bonds. Global Government Bonds as well as many Corporate Bonds offer a terrible risk/return profile to investors. There is both interest rate risk (Government Bonds) as well as economic risk (Corporate Bonds). Any turn up in yields could cause potential large losses on bonds. Bonds: Forward returns for bonds and thus a traditional 60/40 portfolio may now carry more risk than at any other point in history.  Advisors will need to be very creative in the future on how to invest those near or in retirement as traditional fixed income may carry as much risk as equities, something the efficient frontier may have not modeled for. While diversified equity investing maybe hurting investor returns year to date, small pockets of the market are doing quite well. Mid-Cap Growth, Software stocks, Utilities, and REITS are a few areas in solid uptrends. 

What is the news driving markets and Investor perceptions?

Trade Wars, Fed Rate Cuts, Negative Interest Rates, Yield Curve Inversion, Trump Impeachment, Brexit, and Recession!

  • Did I cover all the monsters in the room? Both advisors and clients all know the same information due to the internet and easier access to information. This has made sentiment poor and both advisors and clients have reacted by lowering equity allocations. Is this the fuel that keeps the market afloat?

  • Allocations to cash is reaching highs not seen since 2015. 
  • Will a recession happen if everyone expects it to happen? Either we have talked ourselves into a recession, thus creating the most anticipated and least likely surprising recession in history, or possibly it’s time to take the other side of this bet?

  • Markets in the short term are highly news driven, which is also feeding into the poor market sentiment.

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