As we head into the dog days of summer, our country remains divided politically and skeptical about the economy. Investors are worried about headline risks. Tariff threats are creating fears over growing trade wars. Uncertainty around the direction of interest rates adds to the risks in global investment markets. With the 2020 election 16 months away, political rhetoric has already started to ramp up. Voters need to brace ourselves for the coming barrage of political ads touting conflicting policy proposals on contentious topics such as immigration, health care and climate change.
While media headlines highlight the risks to the economy and our political process, the US economy and broad investment markets continue to post impressive results. The current US economic expansion reached 10 years in March and is now the longest period of continuous economic growth in US history. The economy advanced at a 3.1% rate in the first quarter of 2019, and has yet to show signs of an imminent recession. With the major US stock indices all at record highs as of July 3rd, 2019, year-to-date gains provided investors good reason to celebrate our nations’ birthday.
In fact, it’s hard to find an investment category that did not deliver outstanding returns in the first 6 months of 2019. As has been the case for most of the past decade, US stocks outperformed foreign stocks, but both were up more than 10%. Large US growth companies gained more than 20% on average, compared to about 16% for large US value stocks. Small- and mid-cap US stocks also gained between 15% and 20% on average. The unexpected sharp drop in longer-term interest rates benefited bond values and stocks in interest rate-sensitive sectors such as real estate and utilities. The Barclays US Bond Aggregate Index, which was expected to provide stability and a 2.5% yield, was up a little over 6% through June 30. Lower interest rates have spurred a bounce in mortgage refinancing.
Given these six-month gains in portfolio values, many investors are wondering what to expect from here. It’s rare for interest rates to fall while stock prices are surging. But it is possible that both positive trends will continue in the second half of 2019. All signals point to the US Federal Reserve Bank reducing the Fed Funds interest rate this month and perhaps one more time in 2019. If that happens and the trade war threats subside, economic growth could be stimulated by global trade and continued low interest rates.
Of course, the fears stoked in the headlines could come to fruition leading to political disarray and economic contraction. In this scenario, portfolio values are likely to decline. We can help to limit potential losses by maintaining an appropriate asset allocation mix and holding sufficient cash reserves to get through a down period. Short-term investment performance is difficult to predict, so we believe your investment allocation should be based on your family’s financial plan, not political rhetoric or economic predictions.
This article was authored by Christopher Borden, a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Talk to your financial advisor before making any investing decisions. Barclays U.S. Aggregate Bond Index is an unmanaged market value-weighted index for U.S. dollar denominated investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year.
©2019 Canby Financial Advisors