2019 - 2nd Quarter
JAN’S QUARTERLY LETTER – 2nd Quarter 2019
The Stats…2nd Quarter 2019 through August 2019
The second quarter of 2019 was much better than the first. All indices ended on a positive note--4.30% for the S&P 500, 3.21% for the DJIA, and 3.87% for the Nasdaq. On the other hand, August was the second-worst month of the year so far. Year to date results through August 31st though were up for all indices—16.66% for the S&P 500, 13.01% for the DJIA, and 20.17% for the Nasdaq.
Are we going to have a recession?... Yes! ... When? … Nobody knows!
As I write this letter, US and China trade talks are stalled and China is about to be hit with considerably more tariffs in about 24 hours! By the time you read this letter, the whole matter could be settled, the situation could have escalated to an all-out global trade war, or we could be stuck right where we are now. Trade conflicts affect how companies make decisions about short- and long-term purchases, mergers and acquisitions, plant closings, etc. Let’s hope that agreements can be reached sooner rather than later.
Our GDP is still growing about 2% but earlier this year our GDP was 3%. Our economy is not contracting but growth is slowing. Inflation remains below 2%, even though low unemployment (currently at 3.7%) and rising wages (about 3% annualized) historically cause inflation to rise. The good news is, consumers continue to spend, and they make up 70% of our GDP. Conversely, business investment and expansion has slowed; uncertainty surrounding tariffs and ongoing trade disputes are a primary reason for the slowing. International economies have been hit harder by the tariff situation than we have. For example, China’s economy is slowing rapidly, and Germany’s economy also contracted last quarter (two quarters of contraction in a row is considered the beginning of a recession).
Many of you have been asking about the Inverted Yield Curve. It has been in the news lately. It means that short-term interest rates are higher than long-term interest rates. That is believed to be a leading indicator of a coming recession, but it is not a cause of a recession.
The economists I follow are not predicting a recession this year and not early next year either. Although less confident and concerned, they think our economy could avoid a recession altogether – former Federal Reserve Chairwoman, Janet Yellen, falls in that camp. Resolution of the current trade dispute would go a long way in helping our economy remain in recovery a bit longer.
We are in the longest recovery in recorded history right now, more than nine years. For your information, historically our economy has fallen into a recession on average every 4 to 5 years and recovered about 22 months later. Remember, some recessions are very mild and some much more severe – the recession in 2008 was the worst recession we have experienced since the 1930s.
So, What Should You Do?
I urge you to make sure you have adequate cash reserves and funds set aside for planned extraordinary expenses for the next 24 months. If you don’t, raise some cash. Although you will likely owe some taxes on the sales, I suggest you take some profits off the table if you need to build up your cash reserves.
Be sure to rebalance your portfolio. Some sectors of the stock market have performed much better than others. Remember the old saying: “…the higher they climb, the faster they fall”. Diversification prevents you from having “all your eggs in one basket”. You need to sell off some of your gains and reposition into the sectors that have underperformed to remain properly diversified.
You can get some interest on your cash savings now! It may not seem like much, but 2% or 3% yields are exciting compared to the miniscule interest rates available in the past nine years. If you have a large sum of money in your savings, checking or in your brokerage accounts, consider CDs or Treasuries to get a real return on your money again.
If you’re interested in investing cash right now, I suggest you “dollar cost average” into investments to avoid making a lump sum investment at the wrong time. For example, instead of investing $12,000 on one day, invest $1,000 each month for a year. That way, the cost of your investments is spread over time and not tied to the price on a particular day. A volatile stock market is typical late in an economic recovery, and recently volatility has picked up. There is one positive note with this situation. Money managers can more easily find opportunities when the stock market is volatile. Hopefully, this will help their performance long-term.
Last point, and it’s important, there is a good reason why investors have invested in stocks all these years. Long-term, stocks have provided attractive returns compared to many other investment vehicles. I find it helpful to remember that profitable, successful companies do not close their doors during difficult times but rather continue to grow and focus on long term profits. Although it is not fun to look at your investment statements during a downturn, if you have adequate reserves you will not be forced to sell into it. The stock market (by that, I mean a diversified portfolio of high-quality stocks, not one stock) has always come back up and continued to rise. As one of my clients you know we also have a “Plan B” for generating cash distributions when equities are declining in price.
I wanted to thank everyone who attended our WOW event in July. I hope you had as good a time as I did. Gaye LeBaron gave a wonderful talk on Sonoma County history, answering the questions that you had submitted earlier. There was magic and a hysterical scavenger hunt as well as a terrific dinner. If you missed it, hopefully, you will be available next year.
We will be having our fourth quarter event coming up on December 12th. Economist Robert Eyler will be giving his 2020 economic outlook. I hope you all can make it. Your invitation will be coming soon.
I hope you and yours had a wonderful summer.
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: Wall Street Journal; Morningstar.com; LPL Research; 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.