4Q2018 | All Ages
Global equity markets suffered by far their worst month of the year in October, as a rapid sell-off erased much of the year-to-date gains that the first 3 quarters had produced. The Dow, S&P 500, and NASDAQ dipped -4.98%, -6.84%, and -9.20%, respectively. International markets offered little help, with the MSCI EAFE (Developed International) dropping -7.95% and the MSCI Emerging Markets Index shedding -8.70%. Even bonds, which typically move inversely to stocks, suffered losses as rates spiked. The Barclay’s US Aggregate Index lost -.79% for the month as the 10-year treasury yield settled in around 3.16%.
At the time, the sell-off was primarily attributable to three factors: uncertainty surrounding mid-term elections, modest slowing in corporate earnings forecasts, and fear of an overly-aggressive Fed moving forward. While the unsurprising split-congress result gave the markets reason to celebrate for a day, volatility has persisted in the week following the election as the Fed and earnings growth have come more fully into focus. Though many companies have reported very strong 3rd quarter earnings, several have also issued more tempered guidance moving forward, citing trade concerns, or simply a return to a more normal rate of growth. Tax reform brought an immediate impact to company profits in 2018. While the election result likely means that these rules are here to stay for at least the intermediate term, 2019 offers little hope of any further reductions, and thus the boost to single year growth rate will be muted moving forward. With that said, our perspective is that the market has indeed overreacted to several individual company earnings releases, punishing otherwise favorable results over a more pragmatic approach regarding future outlook.
As it relates to the Fed, we believe that the fear that has markets spooked is driven more so from what Chair Powell is saying about the future, rather than current actions. We have long expected four rate-hikes in 2018, and the increase we are likely to experience in December will make that a reality. However, the tone from Chair Powell has indicated that they plan to aggressively pursue several more hikes in 2019, regardless of what the economic data indicates, with the idea that they need a tool to work with (ability to cut rates dramatically) in the next recession. Our fear is (along with others in the marketplace) that they may just trigger the next recession in the process if they aren’t careful. Higher rates impact consumers directly in areas such as mortgage lending and credit card interest rates, and business in their cost of capital when they assess new projects. While we do believe there is room for rates to still grow without smothering the economy, we will be closely watching these developments in the coming months.
As we wrote in our previous update, it’s been somewhat of a tough year for diversified investors as the portfolio “ingredients” other than US stocks have not been helpful from a return generation standpoint, and only modestly helpful in risk mitigation. However, we maintain high conviction in a diversified approach, and will continue to include a broad spectrum of asset classes in the portfolios that we manage with a focus on consistent, long-term results. While an Asset Allocation strategy will never outpace the leading index in a given year, we believe that the stability provided allows participants to stay invested in both good times and bad, and ultimately delivers the highest chance of a successful retirement.
Thank you for your continued partnership, and best of luck in wrapping up a successful 2018! Please don’t hesitate to contact your advisor with any questions, or to schedule your next review.
Eric Krause, CFA
This commentary is for informational purposes only and does not constitute investment advice nor reference the appropriateness of any individual investment alternative.
Advisory services offered through Prime Capital Investment Advisors, LLC. (PCIA) a Registered Investment Advisor. Prime Capital Investment Advisors doing business as Qualified Plan Advisors, “QPA.” 6201 College Blvd., 7th Floor, Overland Park, KS 66211.