Weathering the Markets' Ups and Downs
As we enter the 4th quarter of 2019, recent investment experience has felt like being on a teeter-totter. Down yesterday, up today. The third quarter was up in July, down in August and up in September. Markets have been bouncing around quite a bit, but we really haven’t moved far from the fulcrum the past two years. Looking back 12 months, we were also on the high side of the seesaw. During the 4th quarter of 2018, the Federal Reserve Bank continued to push interest rates up which spooked investors off their seat and sent the markets down sharply. The Fed changed its tune this year and markets are back up. Where do we go from here? Must be down, right?
Compared to the first nine months of 2018, performance in 2019 has been strong across more investment categories. This positive breadth has resulted in double digit returns for most investors. Foreign Stock markets have gained around 10-15% year-to-date, and that still trails the S&P 500 Index of the largest US companies, which is up a bit more than 20%. Stocks have gained despite many economists’ predictions of an impending US recession.
That same prediction, and a global economic slowdown, have resulted in a fairly sudden and unexpected drop in US interest rates. Lower interest rates have boosted the prices for most Bonds, further supporting strong gains in overall portfolio values. Interest rates on the 10-year US Treasury Note started the year near 2.75% but dropped sharply below 1.5% around Labor Day. This unanticipated decline resulted in an “inverted” yield curve and the Federal Reserve Bank reacted by reducing short-term rates twice in the 3rd quarter. The yield curve is now relatively “flat” and the Bloomberg Barclays US Aggregate Bond Index had gained about 8.5% through 9/30/2019. Interest rate sensitive Stock Sectors, like Real Estate and Utilities, are both up more than 20%, reflecting the value of their consistent dividends and lease income.
Underneath these broad gains in most investment categories, we have begun to notice a shift in two long-term trends. Growth Stocks, like Facebook and Google, have led investment gains since the 2008 mortgage crisis, but Value Stocks, with their proven, profitable business models, outperformed in September. Foreign Stocks also turned the tables and exceeded US Stock returns in September. These nascent trends may not continue, but by most fundamental measures and historic comparisons, Foreign Stocks are significantly undervalued relative to US Stocks and may be ready to lead markets higher.
Of course, recent broad market breadth does not guarantee the next move on the seesaw is higher. Interest rates now appear likely to remain low for the next year or two. Third quarter corporate earnings are expected to be flat compared to a year ago. We can’t predict short-term market moves. But we do believe maintaining a diversified portfolio allows for participation in positive investment markets and should help to cushion the next move down on the teeter-totter.
This article was authored by Christopher Borden, a financial advisor and Managing Partner 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. The S&P 500 is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. 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.
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