Investment Review and Outlook – July 2019
Markets and Economy
“Climbing the wall of worry” is the best way to describe markets in 2019 so far. Investopedia (an online investment encyclopedia) describes and comments on the “wall of worry” as:
“Even when financial markets are growing at a healthy rate, under financially sound circumstances, investors always find reasons to worry. Those reasons may be legitimate or not, depending on an individual’s perception of the market and what their investment goals happen to be.”
The primary narrative among financial pundits recently was one of unease due to a potential weakening of the global economy. At varying points during the second quarter, economic data came in with mixed results, but ultimately the quarter ended on a positive note with a strong U.S. jobs report.
As of this month, the current economic expansion became the longest in U.S. history, and much investor worry seems to stem from this new record itself. There is a belief that because the economy has never expanded for so long, it is bound to contract sometime soon. This noise around soft data and slowing growth does have a benefit, though. It keeps investors, and markets, in check. Today, we believe investor sentiment is fairly balanced and healthy.
Although sentiment has diminished relative to the beginning of the second quarter, stocks, bonds, real estate, and commodities have all had a strong year so far. Economically, the U.S. seems healthy, with low unemployment, low inflation, and good consumer confidence. That, along with an accommodative Fed interest rate policy, should continue to buoy markets.
During the second quarter, we saw the following:
- 10-Year U.S. Treasury yields dropped from 2.4% to 2.0%, leading to core bond returns of over 2%,
- global stocks (as measured by the MSCI ACWI benchmark) appreciated 3.6%, and
- the current economic expansion became the longest in U.S. history (10 years).
Investors are widely expecting the Fed to cut interest rates at their late July meeting in order to proactively address any burgeoning economic weakness. The chart below shows both Fed and market expectations for interest rates over the next few years–lower in both cases. The appropriate worry may now shift to one of “easy money” and the potential creation of “bubbles,” or excessive asset prices. There is always something that needs our watchful eye. All things considered, the first half of 2019 has not changed our market outlook, and we remain cautiously optimistic. Central banks, and in particular the Fed, seem likely to keep economies humming along for now.
Even when results are good an apt reminder is helpful. The chart below shows various asset class returns over 20 years and highlights the poor results of the “Average Investor.” This result is a good reminder of the inherent risks of an undisciplined approach. There may be countless reasons for such a low return by so many “Average Investors,” but a large portion is likely due to an often failed attempt to sell before the worst days and buy before the best days. History shows that market timing is not a prudent investment strategy—it is high risk and usually results in subpar returns. Instead, we are devoted to an investment approach based on broad diversification, risk assessment, and results after all costs and taxes. This holistic strategy is a proven way to achieve higher return for each unit of risk.
