Market Insights - October 2018
US stock markets shrugged off trade and tariff concerns, political uncertainty at home, and rising yields; consumer confidence surged to near record highs along with US stocks. However, globally balanced portfolios lagged behind, faced with dual headwinds of a rising dollar and rising yields. International diversification diminished returns so far this year; developed market equities have fallen a little more than 1 percent in 2018 while emerging markets have lost nearly 8%.
Growth in earnings…an economy on fire
Revised economic growth came in at 4.1% for the second quarter, an extraordinary number this late in a recovery. Corporate profits for the S&P 500 grew at a 26.9% rate year over year in the second quarter; the consensus estimate is for 21% growth in the third quarter. Initial jobless claims are at their lowest level since the 1960s.
The Standard & Poor’s 500 index of large US stocks gained 7.7% for the quarter and 10.6% year-to-date, while the Dow added 9.6% for the quarter, 8.8% year-to-date. Smaller companies’ returns surged, the iShares Core S&P Small Cap ETF (IJR) added 14.6% for the year. Real estate, measured by Cohen & Steers Realty Shares (CSRSX) gained 1.7%for the quarter, 2.7% for the year. Fixed income returns were muted; the U.S Aggregate Bond index was unchanged for the quarter and slightly negative for the year, while emerging market bonds are down 3.6%. High yield bonds, measured by the PIMCO High Yield Fund (PHDAX) have gained a modest 1.5% for the year.
Is it time to exercise caution?
In the short term, yes, for two reasons. First, the earnings bar has been raised high, and disappointments here could have a dramatic impact on multiples and stock market valuations. Second, while rising yields have not had material impact on stock prices yet, there will come a time when they become a factor in valuation. the Fed has raised their key target rate for Fed funds to 2.00-2.25% at the end of September, and we still expect another rate increase this year and two in 2019.
Price corrections in financial markets are generally short lived, occur much more frequent than commonly thought, and although painful to endure, irrationally feared. A conservative investor, equating price with risk, could easily see the weakness in international investments as a buying opportunity. Also, while rising yields have impacted bond prices, the higher yields on bonds we purchase now will have a significant effect on portfolio returns and risk, as we are able to obtain higher returns on the safest investments in our clients’ portfolios. The chart below shows intra- year drops in the market from 1980 to the present, along with annual returns. Despite average intra-year declines of 13.8%, annual returns were positive in 29 of the 38 years.
Rules for Investing…from some of the best
“Bulls and bears make money pigs get slaughtered.” -Jim Cramer
“He who sells what isn’t his’n, must buy it back or go to prison.” (On short selling) -Anon.
“When all the experts and forecasts agree, something else is going to happen.”- Bob Farrell
“It is not good to be too curious about the reasons behind price movements.” -Jesse Livermore
“A stock-market decline is as routine as a January blizzard in Colorado. If you're prepared, it can't hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.” -Peter Lynch
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1.” -Warren Buffett
“Diversify. In stocks and bonds, as in much else, there is safety in numbers.” -Sir John Templeton
“The difficulty lies not so much in developing new ideas as in escaping from old ones.” -John Maynard Keynes
“Investing is the intersection of economics and psychology.” -Seth Klarman
The best way to measure your investing success is not by whether you’re beating the market, but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”- Benjamin Graham
“Money is not the most important thing in the world. Love is. Fortunately, I love money." - Jackie Mason
Registered Investment Advisor
Eugene Balerna, CIMA ®
Director, Investment Research