The portfolios turned in positive results for the third quarter of 2018 as well as the last 12 months ending September 30th. The U.S. based asset classes did better than international, and the sectors were also positive. Domestic markets continued their climb due to strong GDP growth and low unemployment. Global equity markets showed positive returns and positive GDP growth, despite the major central banks ending their respective quantitative easing programs. The U.S. continues to be the best performing economy of the developed nations.
Asset Class Performance Over the Last Twelve Months:
- Yields on cash assets continued to rise in 2018. The Federal Reserve is slowly moving short-term cash yields higher.
- September 2017, the 3-month T-Bill was yielding 1.06%, and a year later (September 2018) yields have more than doubled to 2.19%.
- Bond yields continue to rise as the Fed is increasing rates in response to an improving economy. The Fed is being pressured to reduce their balance sheet which also pushes rates higher.
- Short-term bonds made slightly positive returns while long-term bonds declined as rates increased. Over the last twelve months, the US Treasury Short Bond Index was up 1.28%, while the longer-term US Treasury 20+ Year Bond Index was down significantly -3.49%.
- Foreign bonds (Bloomberg Barclays Global Agg ex-US) turned in a 2.4% return over the last twelve months.
STOCKS (see chart above):
- All equity asset classes turned in positive returns with the exception of Precious Metals.
- The Dow Jones Industrial Average was up 17.7% for the last year and was up a significant 7.4% in the latest quarter. The more broadly-based S&P 500 Index was up 17.9% over the last year while earning 7.7% in the third quarter.
- International equities (as measured by the MSCI EAFE Index) were up slightly at a 1.4% for the most recent quarter and turned in a 2.7% return for the last year. European equities (MSCI Europe) were just above break-even, with an increase of 0.3% over the last year. The Pacific Rim markets were positive with Japan (MSCI Japan) up 10.6%, while Asian stocks (MSCI Asia-Pacific ex Japan) posted an 2.2% return over the last year.
- Domestic utilities provided a small 2.2% return (MSCI USA Utility Index) over the last year. This being somewhat of a flight to safety as this asset class tends to be interest rate sensitive.
- Technology was the top sector with an outstanding 23.3% return (MSCI – ACWI Information Technology – a global index) for the last twelve months.
- Energy stocks turned in a 16.9% return (MSCI ACWI Energy Index) for the last year as oil prices continued to move higher.
12-24 Month Outlook:
- U.S. GDP (Gross Domestic Product) increased at a resounding annual rate of 4.2% in the second quarter of 2018 after the first quarter provided a 2.2% growth rate. Projections indicate some slowing over the next four quarters as interest rates continue to climb and the tax cut stimulus becomes normalized in the economy.
- In August, U.S. Leading Economic Indicators increased 0.4% following a 0.7% increase in July. The Leading Indicators are an important guide for economic growth in the future. The Coincident and Lagging indicators both increased 0.2% for the month of August. These figures suggest continued moderate growth into 2019.
- The global central banks continue to reduce quantitative easing. As a consequence, the IMF (International Monetary Fund) has downgraded its growth forecast for this year from 3.9% to 3.7%. They also reduced their 2019 projections from 2.7% to 2.5%.
- September inflation in the U.S. came in at 2.3%, down from 2.7% in August. Energy was the highest contributor to inflation in September. We expect the U.S. and global inflation rates to increase modestly over the next several years.
- The Fed is expected to continue raising rates as they reduce their balance sheet which is currently at $4.176 Trillion. Interest rates are expected to rise for the foreseeable future.
- The unemployment rate was 3.7% domestically in September, the lowest rate since 1969 (almost 50 years). This should bode well for the consumers.
Investment Strategy Moving Forward:
- CASH – Money market funds are now paying rates just above 2.0%. Notwithstanding, yields on many savings and money funds are still well below 1.0%. For now, our cash allocations will remain low.
- BONDS – The Fed has made it very clear that they intend to raise rates for an extended term to lower their balance sheet. With that in mind, we will avoid long-term bonds as rates continue to rise. Our approach is to hold only short-duration bonds in the portfolios for the foreseeable future. International bonds should do well as central banks will need to refrain from raising rates to protect their fragile economies.
- STOCKS – Looking forward, our outlook remains positive in equities. Stocks look favorable due to continued GDP growth, reasonable valuations, and improving consumer demand.
- Domestic Large-Cap stocks is our largest asset class and should continue to benefit most from the domestic economic improvement. Small caps may experience some headwinds as their valuations have been expensive.
- European stocks remain attractive for the long-term as their valuations are cheaper than the U.S. markets. The European economy is facing headwinds as the ECB is cautiously reducing monetary stimulus.
- Asian growth continues to improve, but there are concerns of a trade conflict. China may be the one area of concern with a slowing economy and trade issues.
- With the increasing inflation rate, we believe commodity-based asset classes (Energy and Precious Metals) should have good growth potential.
- Lastly, technology-based equities should do well in an improving economic environment. There has been some retrenchment as market valuations may be reaching the upper levels.
We remain positive, notwithstanding the most recent (post quarter-end) market volatility. This year has been somewhat of a rollercoaster beginning with the runup in January, followed by the drop in early February through March (a market correction of over 11%). Since then, the markets have been slowly climbing back to new record highs (DJIA high 26,951 on Oct. 3rd). With the increase in the markets over the last six months, valuations had become somewhat lofty and prone to profit-taking.
Currently, we have positive domestic GDP growth, significant corporate earnings, historically low unemployment and an improved corporate tax policy. We expect the consumer will add to overall growth in the economy with unemployment at historically low levels. All of this should bode well for the domestic economy. Globally, market valuations are not as lofty as the U.S., but also have more room to grow in an improving world economy.
At this point in the economic cycle, we expect continued global growth with low-to-slightly higher inflation. There are no meaningful indications of an economic recession occurring in the near-term. The most notable issue for the markets is the Fed increasing interest rates. As such, we continue to maintain a bullish stance moving forward.
Please let us know if you have any questions on the overall strategy and holdings in your personal portfolio. We are always happy to chat about your individual financial situation. We greatly appreciate the confidence you have shown in our services. Thank you for your business!