Market Review and Commentary - Second Quarter, 2018
The record-long bull market continues, at least for now. On March 9, 2009, the Dow Jones bottomed out at 6,547. At the close of this quarter, June 30, that index stood at 24,271, almost a four-fold increase in nine years. However, recent momentum of corporate earnings and economic growth has slowed, but all-in-all, upward prospects look good for the long-term investor. (Future results will vary.)
Some market watchers speak of the “noise-to-importance ratio,” an artful phrase to say little news is material to the long-term investor. Regardless of one’s politics and sincere assessment of current events, our nation is not mired in recession - at the moment. Fortunately, our clients have kept politics and investment discipline separate. Economic and political developments, of course, do have cumulative market impacts, though their arrival can never be scheduled precisely.
While the onset of inflation only becomes observable in a rearview mirror, this much is certain: the federal government is now spending a trillion dollars more than it takes in annually. Inflation fears earlier this year created market jitters that have since dissipated. (Baby Boomers will remember living through double-digit inflation 40 years ago.)
The Fed has long been charged with “removing the punch bowl” before the party of cheap money winds out of control. The Fed has dutifully raised interest rates from their historic lows during this period of full employment. Also, the threat of inflation has been blunted, in part, by productivity strides achieved through technology. Take for instance robots that have replaced five of six manufacturing jobs that have disappeared – jobs that protectionism won’t restore.
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Trade risks will be an even bigger factor for investors in the second half of the year. Already corporate boards are reconsidering capital investment; we hear of delayed plant expansion and new hires. If too much uncertainty pervades, captains of industry withhold long-term bets and sideline their capital until visibility improves.
Headlines have captured targeted tariffs, such as those imposed on American soybeans, bourbon, and Harley motorcycles. There is no indication when the tit-for-tat of new tariffs will end.
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Given current and longer-term trends, our firm is considering a certain shift within our portfolios. As for the basic stock/bond mix, we will consider a slightly higher position in bonds. As for the stock portion itself, we may increasingly look at the rest of the world and invest more abroad, lest we suffer “home-country bias.”
In 1984, when the firm began, the U.S. represented one-third of global GDP. Today, it’s 22%. Likewise, the U.S. had represented two-thirds of global stock market capitalization, and today, it accounts for just over half.
Developed countries now constitute 35% and developing nations 11% of the combined global stock markets. America’s reduced percentage of the global economy is not a failing of its 300 million citizens, but what occurs in periods of peace, prosperity, and cooperation among a world population of seven billion. The length of our slice of the global pie is growing vastly faster than the width thanks to global integration.
Because of home-country bias, U.S. investors have nearly 75% of their investments in U.S.-based assets. Our firm is considering a larger foreign stock allocation as part of our long-term strategy. We will bring this to our portfolio review meetings with clients.
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It’s scary to be scared. Over the past 20 years, the average American investor achieved a scant 2.3% annualized return as compared to nearly 7% if one had stuck with a traditional, moderate risk 60/40, stock/bond portfolio. The chief culprits for underperformance include poorly timed and often emotionally driven investment decisions. (Source: “Quantitative Analysis of Investor Behavior,” by Dalbar, Inc. an investment research firm.)
As shown by Nobel Prize-winning research, it is the consistent application of a particular investment strategy that is the chief determinant of long-term results. Bottom line: keep emotions out of the mix and you will be happy you did.
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We are pleased to enclose your performance report for the quarter ending June 30. As always, we welcome your financial planning and investment questions.
P.S. - Former U.S. Treasurer Rosie Rios was among featured speakers at the Financial Planning Association conference recently held at the Palace Hotel, San Francisco. Treasurer Rios’ signature appears on billions of Federal Reserve notes still in circulation. (Pull out a bill and look to the left of George or Abe’s portrait.) For extra measure, Treasurer Rios autographed two-dollar bills for conference attendees Milo Hanke and Manuel Burkhardt-Apolonio.
The Hayward, California native, and daughter of Mexican immigrants, shared an inspirational story of rising from poverty, attending Harvard, raising hundreds of millions of dollars as a San Francisco venture capitalist - all this before joining the Federal Reserve Transition Team in 2008, a perilous time for the world economy. After being named Treasurer, Rios paved the way to include the first woman (historical, not allegorical) to appear on our currency. Harriet Tubman, an American abolitionist and political activist who had been born into slavery, was selected to appear on the twenty-dollar bill.
Current Treasury Secretary Steve Mnuchin will not commit to producing the new twenty-dollar bill. All the same, it’s safe to say, you will be seeing more of former Treasurer Rosie Rios.