“History doesn’t repeat itself, but it does rhyme.” – Mark Twain
Volatility appears in vogue again. Third quarter results were very positive and had a nice steady climb for investors. Unfortunately for the second time this year, investors are seeing their gains for the year swept away by headline news and uncertainty of future growth. While not the same pattern we saw in January and February, the capital markets quickly approached levels which push us back close to where the year started. It may not repeat, but it sure seems to rhyme.
What has the markets so bothered again? The three T’s (President Trump, trade, and tariffs) continue being front of mind, just as I wrote last quarter. While negotiation over a new NAFTA deal with Mexico and Canada went relatively quick and orderly, the on and off again China negotiations appear headed nowhere fast and bring the greatest uncertainty for continued economic expansion. There is an ebb and flow speculation of trade tension bubbling over into a full-blown trade war. The next potential progress point will be the G20 Summit at the end of November.
The markets seem used to Trump’s tweets, so I don’t believe his recent jabs at how the Fed is doing their job are what rattled the markets this time around. The decision on whether the U.S. Treasury will render a verdict on China being a currency manipulator is likely a significant volley in potential trade war escalation.1 The last time currency manipulation charges were rendered was in 1994 under Clinton. Also working their way into the fold are companies adjusting future earnings guidance lower based on tariffs increasing their input costs. Some companies are trying to absorb the higher costs while others are passing them onto consumers. Absorbed costs reduce earnings if they cannot offset with other savings, pricing products higher potentially sparks inflation.
Fed Chairman Jerome Powell commented the Fed Funds Rate is still below the longer-run neutral rate, so we anticipate continued rate hikes into 2019 where three more hikes are forecasted by the Federal Open Market Committee (FOMC).2 There was a significant jump in long-term treasury yields over the past few weeks. Is the Fed simply trying to reload rounds into their monetary policy tool belt or do they have concerns about where inflation could head in a trade war? Both the FOMC and the IMF project slowing growth in 2020 and beyond as the impacts from the recent tax cuts and government spending begin fading.3
So where does this leave investors? We are in the later rounds of a very long economic expansion which means risks are growing to the downside. This month’s events remind us the capital markets are indeed a volatile place. You are trading the opportunity for greater returns with risk. Risk and reward are fundamental, you cannot have one without the other. Selling your shares during downturns causes you to miss opportunities when the market stages a comeback. As witnessed in 2009, the markets can recover quickly, even if the economy is recovering more slowly. Some investors have still not comeback and have missed out on the longest bull market in history.4
Remember, investing is for the long-term! These relative abnormalities may not all repeat themselves over time, but we should recognize there’s a rhythm and rhyme to the markets and it rewards those with patience. Large-cap has outperformed mid and small. Growth stocks better than value. Interest rate increases have proven a head wind for bonds and other rate sensitive instruments. Domestic has outperformed international. Most everything has a reversion to the mean over time, part of the rhyme of the capital markets, which is why we believe in a broad asset allocation and building diversified portfolios for clients.
Please reach out if you have any questions or concerns. Your calls and emails are always welcome and your business greatly appreciated. Don’t forget to login to our client portal to see the specific returns for your portfolios (https://areniteadvisory.com).
Daniel D. Sands
CFP® | Principal @ Arenite Advisory
17822 E. 17th Street, Suite 212, Tustin, CA 92780
Phone: 949-522-6560 | Toll-Free: 866-330-1443 | Fax: 949-771-9817
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