PPG Insights

Quarter 3 2019 Market Overview: Perspective

This past quarter the S&P 500 Index rose 1.7% with volatility characteristics much like the second quarter of 2019. On August 5th, the S&P 500 Index recorded its worst day of the year, plunging nearly 3% amid worries over trade and the global economy. Those concerns were sparked by weaker overseas economic data and a yield curve inversion. The inverted yield curve triggered immediate negative sound bites that a recession was just around the corner.

Our view is that a recession is not just around the corner. Our view is that the brief yield curve inversion was driven by a search for yield rather than caused by weak U.S. data. Today, with a record level of negative-yielding debt overseas, most roads lead to the U.S. bond market when investors are searching for positive yields. Couple this with baby boomers retiring and adjusting their portfolios to include more exposure to bonds, it is likely that the extra demand for U.S. Treasuries will keep U.S. rates lower for longer.

To be clear, to the question of will we have another recession down the road at some point? The answer is yes, of course we will. It is for this exact reason that your portfolios are structured in a diversified and balanced way, with that eventuality in mind. To date, the U.S. economy is performing very well with low unemployment, low inflation, high consumer confidence and a stable housing market. This is all despite renewed fears of a cold war with China regarding trade, political sclerosis regarding Brexit, attacks on Saudi oil facilities, problems in the repo market, and, finally, the possibility of impeaching the President of the United States.

To place things in perspective, we remain constructive on the U.S. economy, confident in our portfolios and as always, will continue to be vigilant and consistent in our approach.

Quarter 3 2019 Market Analysis: Perspective

By the time this note reaches you, much of the news of the day will have changed many times. We live presently in an age of instantaneous news dissemination. There are so many choices now in where to get information that sitting down to watch the 6:00 p.m. news is rapidly becoming a habit of generations past with little relevance to today’s news consumers. In fact, it is entirely likely that your watch will vibrate with another ‘tweet’ from our President Trump, while you are reading this!

This past quarter the S&P 500 Index rose 1.7% with volatility characteristics much like the second quarter of 2019. On August 5th, the S&P 500 Index recorded its worst day of the year, plunging nearly 3% amid worries over trade and the global economy. Those concerns were sparked by weaker economic data overseas and a yield curve inversion. The inverted yield curve triggered immediate negative sound bites that a recession was just around the corner. Our view is that a recession is not just around the corner. Our view is that the brief yield curve inversion was driven by a search for yield rather than caused by weak U.S. data. Fundamental factors such as domestic economic growth and inflation, traditionally dictate the level and direction of interest rates and the shape of the yield curve. Today however, with a record level of negative-yielding debt overseas, most roads lead to the U.S. bond market when investors are searching for positive yields. Couple this with baby boomers retiring and adjusting their portfolios to include more exposure to bonds, it is likely that the extra demand for U.S. Treasuries will keep U.S. rates lower for longer.

Fifteen days prior to that August day, when the S&P 500 dropped almost 3%, the 50th anniversary of the historic Apollo 11 moon landing was commemorated. An amazing feat that fulfilled a nation’s dream and answered a challenge by President Kennedy eight years earlier. Here at the office, hanging on the wall of our Director of Research, is a Morningstar Andex chart. The Morningstar chart plots historical stock market returns along side key historical events such as news, the political party in power, inflation and so on, all the way back to 1929. On that day when Neil Armstrong stepped onto the lunar surface of the moon, Nixon was in office, the median sales price of a new one family home was $18,700, the minimum wage was a $1 and a first-class stamp cost 8 cents. On that same July day in 1969, the Dow Jones Industrial Average having slid 18% in the prior six months, stabilized around 801.96. From the New York Times Magazine (August 31, 1969, p12), Charles J. Rolo wrote: “When Wall Street Catches the Flu, 26 Million Americans Ache”. In the piece he writes of a veteran stock broker describing the scene this way: “There are the conservative investors, many of them retired people with plenty of money, who invest for long-term growth and good income. They are sitting tight on quality stocks and they aren’t worried.” That has always been our philosophy also, here at P.P.G., and how we have invested portfolios since 1975.

To be clear, to the question of will we have another recession down the road at some point? The answer is yes, of course we will. It is for this exact reason that your portfolios are structured in a diversified and balanced way, with that eventuality in mind. The National Bureau of Economic Research (NBER) defines a recession as: ‘A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales.’ To date, the U.S. economy is performing very well with low unemployment, low inflation, high consumer confidence and a stable housing market. This is despite renewed fears of a new cold war with China regarding trade, political sclerosis regarding Brexit, attacks on Saudi oil facilities, problems in the repo market, and, finally, the possibility of impeaching the President of the United States.

If one were to glance at the Morningstar Andex chart, which was last updated in December of 2018, one would see that a balanced portfolio has historically averaged around 5.5% a year since 1929. In the last fifty years, there has been an extraordinary growth in the global middle class, the life expectancy for an America male or female has increased roughly ten years over that time span. The median sales price of a new home is $309,700, the minimum wage is $7.25 (2018) and a first-class stamp costs 50 cents. It is sometimes helpful to place things in perspective in order to understand where it is that we have come from, so that we can look forward to the endless possibilities that lie ahead of us.

Thank you for your continued trust.

Warmest regards,

Malcolm A. Makin, CFP®
President

Any opinions are those of the financial advisor and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Additional information, including management fees and expenses, is provided on Professional Planning Group's Form ADV Part 2, available upon request or at the SEC's public disclosure site, https://www.adviserinfo.sec.gov/Firm/108868. Past performance is not a guarantee of future results.