Market Review and Commentary - Third Quarter, 2018
What Would Rosanna Danna Say?
As long-term investors, we utilize asset allocation to mitigate, but not eliminate, market volatility. Portfolio design does much to control the risk but little to predict market movements. That range of movement has been relatively sedate over the last decade; movement has returned to normal measures of volatility.
Market corrections happen fairly often and even in the good years. Since 1948, the stock market (the S&P 500) has been positive 51 or those 70 calendar years. However, when you look at what happens within any one year, it can be dizzying –intra-year swings averaged 13.4% between the low and the high for the year.
So when things get choppy, we are reminded of the inevitability and relative significance of market declines. Here’s our “cheat sheet” for getting through scary times:
A history of stock market declines 1948-2017:
Number of Average
Decline Declines Frequency
5% or more 182 Every 4.5 months
10% or more 56 Every 1.3 years
15% or more 20 Every 3.5 years
20% or more 11 Every 6.3 years
Volatility does not equal financial loss unless one sells. Further, volatility is mitigated by diversifying across a number of asset classes, i.e., not putting all your eggs in the S&P basket.
Savvy investors must navigate and define what is “noise.” Yet living in the real world, we observe with interest factors affecting market behavior and our longer-term prospects:
Reasons for Confidence
Despite the advanced age of this bull market, the fundamentals behind the economy and stock markets are reasonable, not stratospheric.
2018 Gross Domestic Production (GDP) is expected to be up 3.3%, a healthy boost in overall economic activity.
An abiding sign of risk-taking confidence, corporations and small businesses are spending significantly more on business expansion, such as plant, equipment, and payroll.
Trade tensions with our all-important North American neighbors have abated. NAFTA has been renamed and refurbished, not replaced, with Canada joining the U.S. and Mexico for the “new and improved” version.
Interest rates, while ticking up, remain below historic averages.
Reasons for Concern
Labor shortages, which historically contribute to inflation.
The federal deficit is on pace to exceed $1 trillion per year, another inflation threat. Mounting national debt and rising interest payments mean that much less is available for fiscal stimulus during future recessions and national emergencies.
Sparking higher prices for producers and consumers, trade tensions between the U.S. and China threaten inflation. Tariffs will continue to harm American businesses as it appears China will not heed U.S. demands for ending subsidies of key industries.
Populist movements in Europe, including Brexit, are hampering investor confidence, placing downward pressure on foreign stocks.
Medical costs – now 18% of GDP - still rise unabated, thus contributing to decades-long wage stagnation, personal bankruptcies, and premature deaths while hampering the growth of our overall economy. (A number of our clients are howling about the latest round of health premium increases.)
After pondering the above points, the rosy and the nettlesome, we can’t resist quoting the immortal words of comedian Gilda Radner’s character, Rosanna Danna: “It always something.”
And we look forward to what “something” bears reporting next quarter, including what policy changes may proceed from the upcoming midterm elections. Of note are ballot initiatives in four so-called red states: Idaho, Montana, Nebraska, and Utah. The initiatives would mandate a full embrace of the Affordable Care Act through Medicaid expansion. Hopefully, such an outcome might signal a softening of tribal warfare in favor of productive public policy debate.
We are pleased to enclose the performance and advisory fee report of the Third Quarter. We welcome your questions, comments, or concerns regarding both your portfolio and any financial planning matter. If you ever feel apprehensive about current events and how they may affect your portfolio, do not hesitate to call.
Milo F. Hanke, former board president, receives Legacy Award
Below is the citation read at the 47th Annual Beautification Awards ceremony held at the Marines’ Memorial Club on October 15, 2018
During his 12-year tenure with San Francisco Beautiful, Milo F. Hanke became the City’s leading anti-billboard activist. With his leadership, SFB beat the billboard industry at the ballot box four times.
SFB, although outspent 20-to-1, defeated a 2009 ballot initiative to erect a canyon of digital billboards along mid-Market Street.
Later, Milo organized a lawsuit forcing the City to remove 120 small billboards along neighborhood sidewalks.
Leading SFB and numerous neighborhood groups in 2011, he fought AT&T’s installation of 726 refrigerator-size utility cabinets on sidewalks throughout San Francisco (City Hall rally pictured here).
A past SFB president, Milo helped form Scenic East Bay, a group that blocked the installation of several digital billboards near the Bay Bridge. Early in his SFB service, the New York Times recognized Milo’s effort to halt the sale of corporate logos on the Golden Gate Bridge.