2019 Q4 Investment Update
The first three quarters of 2019 rapidly passed but not without noteworthy market performance. While the markets appeared flat last quarter, they were not sideways. In fact, that would be far from the truth. The S&P 500 peaked on July 26th at 3,025* but shortly after experienced a downside volatility. August was full of “ups and downs” with the market bouncing between a trading range. September allowed the market to turn positive for the quarter but gave most of those gains back towards the end.
This last quarter of 2019, our focus will be to ensure our client portfolios align to their strategic allocations based off risk tolerance and cash flow needs. During a year with positive markets, we take advantage of the opportunity to rebalance accounts where needed and take profits off the table. Doing so, we sell on our terms and eliminate the need to raise cash in a negative market environment for the clients that need it.
Lower Interest Rates
In July, the Fed cut rates for the first time since 2008, during the great financial crisis. The central bank cut rates again for the second time in September, lowering the overnight funds rate in a target range of 1.75% to 2.00%.
Negative rates in the US? Not likely. The Fed has a significant and effective toolkit of preferred options if easier monetary policy is required. Negative-yielding assets are a concern with the size of global negative yielding debt exceeding a $16 trillion threshold, accounting for around 30%* of the market value of Bloomberg Barclays Aggregate Index.
According to Olumide Owolabi, Portfolio Manager of Neuberger Berman Global Fixed Income, the Fed will likely rely on the following mix of policies, if needed, rather than pursue negative rates.
- Interest Rate Adjustment: The current short-term rate is in the 1.75% – 2.00% range, giving the Fed reasonable scope to reduce rates back to zero, if needed.
- Forward guidance: The Fed seems more interested in a policy mix of zero interest rates with a commitment to not raise rates unless certain economic objectives are achieved.
- New Asset purchase program: The Fed’s balance sheet is 18% nominal GDP, greatly reduced from its 25% level in Q3 2018. This provides room for quantitative easing.
What we learned so far from the short history of a negative interest rate environment is mixed at best. Economies that implemented this policy approach experienced an initial bounce in financial conditions, economic activity and inflation dynamics, but the gains did not last long.
Climbing a Wall of Worry
We’ve been through periods like this before. From 1969 to 1982, the markets went sideways. This period of time included war, oil shocks, and 20% mortgage rates. The next period of time from 1982 to the end of 2000 was one of the greatest periods of wealth generation in history. This involved the globalization of American brands and PC penetration into our daily lives. Most recently, markets went sideways from 2001 to 2013. This period also included war, the “Tech Wreck” of the early 2000’s, and the consumer debt bubble collapsing.
While we think we are towards the later stages of a bull market and we are seeing a slowdown across global markets, we are excited for the “Radical Efficiency” that technology and innovation is providing. Technology is changing the way we do business, interact, and gain our information. Look what 60 internet seconds look like today:
Source: Business Insider, Statista & Go-Globe.com
Given this, we think this next expansion in the economy will be driven by changes in the food industry, mobile services, content, and innovations in the treatment for illnesses and major diseases. “There is no such thing as a passive approach towards low risk investing…” Don’t allow fear to drive your investment decisions.
Please let us know if you have any questions about the recent market events or how to position your long-term financial plan for the months and years ahead.
- Google- Finance
- Negative Interest Rate Policy: Could It Happen in the U.S.? – Neuberger Berman
- Delaware SMID Cap Growth Fund Pitchbook
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. You cannot invest directly in an index.
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