2019 - 1st Quarter
JAN’S QUARTERLY LETTER – 1ST Quarter 2019
The Stats…4th Quarter 2018 and 1st Quarter 2019…
Fourth quarter 2018 was not a good one for stocks although bonds fared better. Stock markets worldwide fell into correction territory (a decline of 10% or more) from October 1, 2018 to the end of the year. Calendar year 2018 ended with the S&P down <4.38%>, the NASDAQ was down <2.84%>, the EAFE was down <13.79%> and the MSCI Emerging Markets was down <14.57%>. The Barclays Aggregate Bond index was slightly up +0.5% for the period.
2019 started off with a bang! Stock markets both here and abroad soared in January and February. March was more volatile as investors again began to worry about the economy and rising interest rates. Still, the first quarter of 2019 ended comfortably in positive territory. YTD through March 31, 2019 the S&P ended up +13.65%, the NASDAQ was up +16.5%, the EAFE was up +9.98% and the MSCI Emerging Markets was +12.48%. On the fixed income side, the Barclays Aggregate Bond index again gained +2.91% for the period.
How is our economy doing? How close are we to our next recession?
Our last recession began in December 2007 and ended in June 2009. If our current recovery lasts until this coming July it will be the longest on record. Interestingly, most economists don’t think we’re going to go into recession this year, next year and perhaps not even in 2021. True, there are some headwinds. The European economy is slowing and China – albeit, one of the fastest growing economies in the world, growing at somewhere between 5.5% to 7% (depending on who you believe) – is slowing as well. Still, most leading indicators of a coming recession are not in place. Inflation stands at 1.9%, well within the Federal Reserve’s “neutral zone” of 2-2.5%. Unemployment is 3.9% and companies are hiring. Wages are rising at about 3% annually and even more (4%+) for lower earning wage-earners. The price of goods and services is not rising at a pace that is putting upward pressure on inflation. Corporate earnings growth has slowed but is still expected to be 2-2.5% in 2019.
Tariffs and the prospect of trade wars remain a threat to our global economy. On a positive note, Robert Lighthizer, President Trump’s appointed US trade representative and negotiator, has recently announced the US will abandon its plan to raise tariffs to 25% on $200 billion dollars on Chinese goods and services. Ironically, only a few days after Mr. Lighthizer’s announcement, President Trump announced that he has decided to strip India of a special status that exempts billions of dollars of Indian exports from American tariffs, raising new trade tensions. Furthermore, although President Trump signed the USMCA (US, Canada and Mexico trade deal replacing NAFTA) last fall, Congress has not yet voted on the revised pact. Ironically, on this issue President Trump has more support on the left than the right as the GOP has traditionally favored free trade.
What To Do?
Here’s where I get boring! I don’t think you should do anything different just because we’re closer to a recession. There are basic rules in financial planning that make sense in all economic cycles. I’ve been a financial planner for four decades (Yikes!!); there have been five recessions since I started and the longest one (12/2007 to 6/2009) lasted eighteen months. No one can accurately predict when a recession will start or when it will end. Stock market performance is a “leading indicator” meaning stocks are likely to fall before a recession starts and rise before it ends. Missing just a few days in a given year can dramatically alter your return for the entire year; a perfect example of that is January of this year. Wow, if you weren’t in the market in January you probably missed the party!
Rule number one: maintain adequate cash reserves. That means enough money to cover at least three months expenses (if you have a reliable salary or pension) to six months expenses if your income is less predictable PLUS funds to cover anticipated extraordinary expenses like a new car, travel, home repairs, etc.
Rule number two: you must diversify! Your entire portfolio should not be in equities, especially if you might need to access funds in the next five years or sooner. Your portfolio should include investments in income-oriented investments whose performance does not correlate with the stock market performance. This allocation will provide you access to funds and allow you to avoid selling stocks into a downturn. As you know, I call this my “plan B” approach.
An old colleague of mine used to say that the stock market was a lot like his grandmother’s ceramic clock – the time was right twice a day! The same is true of stock prices: good quality businesses have an “intrinsic” value that is sometimes higher and sometimes lower than the price of their stock. Remember that businesses continue to sell their products and services in good times and bad. Historically, a well-diversified portfolio of stocks (size, sector, location, growth, value) held for the long term has provided an attractive total return well in excess of inflation.
Rule number three: regularly monitor your financial plan and your portfolio. Review your plan and portfolio at least annually and/or when your financial situation or goals change. Adjust as indicated.
If you need to build up your cash reserves, I strongly recommend you do so now.
Hallelujah! You can get interest on your cash savings again! If you can lock up your funds for three months or longer you can now get 2 -2.5% in both CDs and U.S. Treasuries.
International stocks - both developed and emerging markets - have underperformed U.S. stocks since 2009 for reasons including: monetary austerity early in the recession, geo-political events, a softening economy, Brexit uncertainties, and tariffs. Although volatility is inevitable, I strongly recommend an allocation to both developed and emerging international equities for long-term appreciation potential.
If you haven’t rebalanced your investment portfolio in the past six months, I recommend you do so now.
Our next client meeting will be Thursday, April 18. Chris Haws, Attorney at Law and Jacquelynne Ocaña, Professional Fiduciary will join me in a panel discussion. Our primary topic is estate planning. Our goal is to bring to light some good ideas and suggestions and point out some of the pitfalls and omissions you want to avoid in your planning. There will be lots of time for your questions. The meeting will begin at 5:30pm and will be at the Flamingo Hotel.
I’m excited to announce that we will have a local “historian and superstar”, Gaye LeBaron, as the keynote speaker at our July 25 “WOW” event! As you already know, she will be preparing her talk to address “your” questions and interests regarding Sonoma County history. Before dinner, you will again be amazed with first class magician, Frank Balzerak’s magic tricks. And, if you want to start filling your purse or pockets now, we will be having a scavenger hunt at dinner! You won’t want to miss this one; bring a friend!
As always, I want to thank you for your confidence, your business and your friendship! We are so lucky to have such great clients. I hope that your year is off to a good start and look forward to seeing you soon.
References: Wallstreet Journal; Morningstar.com; LPL Research; KQED: Marketplace; The Economist. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
900 MENDOCINO AVENUE n SANTA ROSA, CA 95401 n (707) 522-8000 n FAX (707) 522-8008
Jan Schneider, CFP ®, is an LPL Registered Principal and Investment Advisor Representative offering securities and advisory services through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
Financial planning offered through JL Schneider & Associates, a Registered Investment Advisor and a separate entity from LPL Financial. CA Insurance License #0560988.