Our quarterly market research summary is short, concise, and actionable. There’s a graph or chart along with the relevant questions: “What does it mean?” and “What should I do?” The goal of this effort is to provide you with an educational executive summary, not bore you with 20 pages listing all the details we noticed over the last three months. We would love to hear your thoughts on it!

Three Q1 2019 Market Themes: March 31, 2019

The Fed U-Turn

What does it mean?

After hiking interest rates four times in 2018 and indicating further tightening would occur in 2019, the Fed suddenly reversed themselves. The U-turn in Fed policy was music to the ears of the financial markets, which had become concerned about further tightening in the face of weakening economic data.

What should I do?

Enjoy the ride while it lasts, but understand the actions of the Fed were done from a position of concern, not strength.

Economic Growth Trends

What does it mean?

Economic data from around the world continues to show weakness despite the efforts of central banks.

What should I do?

Reduce ultra-aggressive holdings such as growth stocks selling at high valuations.
Reduce speculative fixed income investments such as high yield corporate bonds.

Civilian Unemployment Rate and Wage Growth

What does it mean?

Rising wage growth has historically preceded changes in the employment data.

What should I do?

Confirm you are comfortable with the your portfolio’s ratio of aggressive vs. conservative assets.

Have questions? Let’s discuss.

Reach out to us at: BBancroft@ImpactCapLLC.com or (301) 417-3300

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Certain material in this post is proprietary to and copyrighted by Litman Gregory Analytics and is used by Impact Capital, LLC with permission. Reproduction or distribution of this material is prohibited and all rights are reserved.

—transcript—

Hi, this is Bill Bancroft from Impact Capital, where you get the advice you need and service you deserve. Today, the advice you need is reviewing three key themes from the first quarter of this year—let’s jump into it.

The first theme is entitled, The Fed to the Rescue, and shows the chart of the S&P 500 over the last few months along with some comments from the various Fed members over that time. Basically, what happened was as late as December, the Fed was raising interest rates and saying that reducing their balance sheet was basically on auto autopilot. That concerned the stock market, because I think the market already had realized that economic growth was slowing, and they were afraid that further Fed interest-rate hikes would hurt the economy more than it already had. So, the Fed quickly changed their tune in late December and early January, and said that they’d be patient about further rate increases and wouldn’t hesitate to alter their balance sheet runoff plan. So, the stock market loved that news and started rallying. The key takeaway I want you to know from this is that the Fed did what they did out of a position of concern and not strength. If the economy was really humming along, and if everything was hunky-dory, the Fed would still be raising interest rates and reducing the balance sheet. Credit given to Litman Gregory for providing this chart.

The second theme is entitled, Economies Around the World are Slowing. Despite what certain politicians want you to believe, this chart shows that basically wherever we look around the world, economic growth is slowing. What does this mean to you? It means that this is maybe not the best time to be taking risk in your portfolio. When we look at the market, we always look in terms of risk and return. Well, what’s the return been?—it’s been zero for the last year. The markets have gone nowhere. So, what’s been the risk?—during that time period, there was basically a 20% drop. That is the definition of an unattractive market environment, where you’re accepting risk but you’re not getting any return for it.

The third theme deals with U.S. employment and unemployment. This chart shows unemployment and wage growth going back 40-50 years. What I want to show here is when the unemployment rate has gotten really low, which you would think would be great, right?—everyone’s getting jobs, getting paid, and they’re going to spend that money to drive the economy, and be great for the future. When you look at when unemployment has gone down to this level before—it was down here before in 2000, down here before in 2008 and of course now—basically those time periods were not great times to be entering the stock market—there was the Internet bubble and then the Great Recession. This is not a predictive tool or a timing tool, but it should give you some pause based on where this data is. For all I know, this unemployment can continue to fall and this might take another six months—this is not a prediction for next week or next month.The other thing I want to point out here is that in each of these periods, you kinda see a theme where wage growth is picking up before unemployment starts picking up—it happened in the 80s, happened in the 90s, leading into the 2000s, and happening before the Great Recession, which was increasing before unemployment started to increase and you seen it now. So, again, it’s just a word of caution, but what are you to do? First, make sure that your portfolio is invested according to your long-term financial plan. If the plan says you need to be in 60% equities and 40% conservative investments, make sure it is 60/40 and not something like 65/35 or 70/30. Second, I would reduce any speculative investments you have. Maybe you have some high-tech stocks that have done well, or ETFs in that sector that have done well—that might be a good time to cut back on that. When it comes to fixed-income, I would own very boring, bland fixed-income. I would not own corporate high-yield bonds in this environment. I think those—should the economy weaken and the stock market falter—those will weaken like stocks and act more like stocks than fixed income. In that type of environment, you really want to depend on your bonds to be there for you and be stable and reduce the risk of your portfolio.

Those are the takeaways I want to communicate from last quarter. If this is interesting, then feel free to come to our website and see more insights like this at impactcapital.com. I also encourage you to follow us on social media; and of course, you can always reach me anytime at 301-417-3301. Thank you for watching and take care.

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