3Q19 Insights

U.S. stocks and bonds, while quite volatile for stocks in the third quarter, are nicely ahead of the Consumer Price Index – a surprise to many bond investors with interest rates as low as they are. Certainly the volatility in stocks drove many investors to the relative safety of bonds thereby pushing up their market values and returns to client portfolios. June was a BIG help to our clients’ stocks in the year-to-date return calculation as stocks in Q3 registered gains below 2% and some indices recorded negative returns.

Stocks
Our core Stock Strategy remained fully invested in Q3 (as it is designed to do) while our Growth Stock Strategy began to raise cash in the latter half of July. The U.S. economy continues to grow, but there are signs that its rate of growth is slowing – particularly in the manufacturing sector.
Signs of this slowing are:
– Difficult trade talks with China
– Oil price weakness: In January oil dipped below the $50/barrel price to profitably drill a new well
– Deteriorating business confidence impacting earnings outlook
– Corporate profits are at risk of declining which in turn leads to lowered business spending which in turn leads to economic downturn

Bonds
We have maintained this segment of our clients’ portfolios fairly fully invested. ‘Fairly’ indicates that when clients have available cash in their portfolios either from capital additions or bond maturities we have been observant of market forces to include nearby Fed actions to help form our investment strategy regarding maturity point along the yield curve etc. So this ‘cash’ may be available for a period of time while bonds are located to fit the strategy.

The above point notwithstanding we are also opportunistic buyers (& sellers) of bonds that may be mispriced in our opinion – for example, a seller needing to liquidate a portfolio of bonds at favorable prices.

At the present time our investments in taxable bonds are focused on the very short maturity range where we think the best balance exists between yield and maturity. For our clients using municipal bonds the maturity point is longer: 4 to 8 year range.

Outlook
For stocks, since 1928, Q4 has historically been the best-performing quarter which has followed Q3 as the worst-performing. Something to keep in mind now.

We anticipate gradually increasing stock exposure (in our Growth Strategy) if we are able to find good entry prices for stocks fitting this strategy; quite possibly the current market moves to an ‘over-sold’ level which could produce these entry points.

For bonds we are paying close attention to the demand for corporate bonds as it can narrow the yield advantage over Treasurys – a sign of over-valuation. Municipal bonds remain attractive as their tax-exempt yields as a percentage of Treasury yields (which of course are taxable) remains in the high 80%’s – recall that 80% has been a benchmark for this metric. We continue to favor issuers in Washington state but not exclusively so.

Recession concerns? We are in the camp that believes we are NOT on the verge of a recession. Since 1970 there has not been a global recession which has not been lead by a U.S. recession. While the U.S. is becoming a smaller part of the global economy it remains the most important driver of global growth – with China nipping at its heels.

All eyes are on the Fed now. After cuts in the Fed Funds rate in July and September there is mounting speculation that data warrant an additional cut before year end. That could come later this month or at the last meeting of the year in mid- December. At this writing the Fed members appear divided on the need for an additional rate cut.