We always encourage you to focus on the long term.
We plan and allocate your investments so that you will have adequate liquidity to meet your short-term financial needs.
We don’t know how the future will evolve, but we do our best to plan, knowing that the reality is unknown.
While stressing our long-term focus, sometimes analysis and thoughts about short-term market actions and news can be helpful to you.
In general, worldwide stock market indices have declined since September 30th. US and worldwide stock market indices increased in early November (see blog dated November 8, 2018), then declined most of November, with a strong recovery this week, since Thanksgiving.
The decline of worldwide stock market indices since September 30th can be attributed to investor psychology regarding the following:
- Slowing global growth
- Trade tariff impact
- The huge decline of oil prices since early October
- Concern about rising interest rates in the US (see the above cited blog post)
- Valuation concerns about some sectors or individual stocks may have been overvalued
Most of our clients have significant fixed income allocations. For illustrative purposes, let’s say someone had a 50% stock and 50% fixed income allocation. Though the financial markets have declined for the year, a balanced portfolio would not be down double digits on a percentage basis for the year to date. While not what we expect long term returns to look like, it is not anywhere near the losses incurred in a major down market.
We remain confident in our major investment principles, which include:
- Being globally invested for the long term
- Using very low-cost asset class mutual funds and not individual stocks
- Not trying to pick which stocks, sectors or regions will do best
- Owning high quality fixed income and not junk bonds
- Avoiding hedge funds and alternative investments, which lack transparency and can be very expensive
- Over-weighting to value and small company asset classes
On Wednesday November 28, US Federal Reserve Chair Jerome Powell gave a key economic speech. He first discussed his outlook for the economy and interest rates. He then explained in-depth the Fed’s approach to monitoring and addressing financial stability. I found both aspects of his speech to be very insightful and they gave me confidence about the future.
While not everyone will be interested in the full speech, I highly recommend reading this speech, or at least the pages 1-2 about interest rates and pages 13-14 summarizing his thoughts about financial stability. The highlights of the first part of his speech are below. I will likely write about the latter part in a future blog post. The speech is very readable. It shows that the Fed is trying to effectively communicate, as well as look at the financial world and attempt to identify future problems before they become severe.
Powell explained that the Federal Reserve has two jobs, to promote maximum employment and price stability (keep inflation around 2%). He stated that “our economy is now close to both of these objectives.”
The real news which caused the stock market to increase significantly on Wednesday were his comments that the financial markets interpreted that interest rates will not need to be raised much further. He explained that while interest rates are still low historically, “they remain just below the broad range of estimates of the level that would be neutral for the economy-that is, neither (causing the) speeding up nor slowing growth.” (WWM inserted “causing the”)
Powell said he, along with his Federal Reserve colleagues, and many private sector economists, are forecasting “continued solid growth, low unemployment, and inflation near 2 percent. There is a great deal to like about this outlook. But we know that things often turn out to be quite different from even the most careful forecasts.” (Emphasis added)
Powell then went on to discuss the balancing act that the Federal Reserve has, that they are dealing with uncertainty and there is no pre-set path for future interest rate moves. Because no one can predict future events, which cumulatively will affect the Fed’s future interest rate decisions, Wall Street will play a guessing game and this leads to volatility in the financial markets. While all this occurs in the short-term, this is where we remain disciplined and focused on the long-term.
Our bottom line from this speech….
- There will very likely be a short-term interest rate increase of .25% in December.
- We stated in our November 8th blog post that there will likely be two or three .25% short term interest rate hikes in 2019. After this speech, it’s possible that there may less. The Fed will monitor and evaluate how the economy is performing and review its forecasts at each of their meetings.
- Powell does “not see dangerous excesses in the stock market.” He made this comment in the latter part of his speech, when he was focusing on financial stability. He distinguished market volatility, which is normal and expected, from events that could threaten financial stability.
We hope this analysis is helpful to you.
If you have further questions, please contact us. That is what we are here for.