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Quarterly Reflections - January 2019
- Serene Point Advisors
- Jan 11, 2019
- 5 min read
Times aren’t shocking if there are finely modulated distinctions; times are shocking when there is a great clash of things in a society. ~ Philip Roth, interview in 2003 with David Remnick, editor of The New Yorker
On the economy
In November, the Federal Reserve issued its first ever “Financial Stability Report”1 and investors around the world sat up straight in their seats and went to work selling equities. The report highlighted known problems with trade tensions, rising corporate debt from companies with weak balance sheets and more geopolitical uncertainty. It also suggested that its own rate-raising actions could cause investor malaise. What was likely intended as a warning against a rude awakening, provided fuel for a disorderly exit race.
Without a doubt, the Fed will be in the driver’s seat again in 2019. Notes from the December meeting - after which borrowing rates were raised to 2.25%, notably above current inflation - show that the Fed is now prepared to be patient regarding future increases. But already tight financial conditions, here and around the world, will be a drag on U.S. growth this year with GDP retreating to a still-above-trend estimate of 2-2.5%.
Featured as a back seat driver, will be the U.S. and China trade dispute. Like 2018, much of the global economy’s fate will rest in the gigantic hands of these two governments. The Economist laid out two potential outcomes of the trade negotiations2.
To paraphrase the article’s scenarios, a win-win trade resolution that would allow China to rebound will have trickle down positive effect on their Asian neighbors. A broad rebound would greatly benefit the Eurozone too, which remains heavily dependent on exports to emerging markets. Add in a soft Brexit (“soft” is still to be defined) and world markets could rally. Reverse that if the trade war results in a win-lose or keeps the current score of lose-lose.
On the markets
In only three of the last 90 years have both the S&P 500 and the benchmark 10-year US Treasury bond lost money – 1931, 1941 and 1969. 2018 narrowly missed being added to that list with the bond price eking out a 0.07% return3. Stocks started out the year emotional and volatile, recovered and then returned to volatile and bearish conditions, with many indices notching a 20% or more decline after previously trading in an upswing.
Underlying the market volatility is the reality that nearly 85% of all trading happens automatically4. Trading is now primarily driven by computer models, index investors, quantitative hedge funds and other groups with pre-set inputs that exacerbate market conditions to the up and downside. These models have been quietly percolating on the side of our mostly calm U.S. market for years and thus untested. But once triggered by the start of the decline, these models went into drive, amplifying market swings in both directions, much like what happened earlier in 2018.
Considering the bigger picture, as Mohamed El-Erian noted on October 10th, the markets are necessarily becoming more fundamentally focused, and that is encouraging for value-oriented investors5. On a relative basis last quarter, quality and cash-rich companies outperformed. The shift away from a liquidity market, an “anything goes” market, juiced by years of cheap money is a painful, chaotic transition. However, one welcomes a market that puts strong emphasis on a company’s quality earnings, positive cash flow and growing dividend. For what is a publically traded company’s ultimate responsibility? The return of shareholder equity, of course!
On personal finance
Perhaps you have all of the to-do lists you can handle right now. Most people do not need another high-bar aspirational exercise that will end in disappointment. But take this annual financial list and quickly cross off the easy ones or those you have already done. Then work through the rest as time permits over the next few months. Ask us for help when necessary and check the website (www.planserene.com) for help with any of the paperwork.
Budget. There are too many software tools online to ignore this critical financial task. A few you might search for and consider are Clarity, Mint and You Need A Budget. Offline you can use Excel or keep data in a notebook. Click here for a printable option.
Create your personal net worth sheet. You might not know where you are going if you don’t know where you have been, so write down your assets and liabilities. Click here for a printable option.
Manage your debt. Make a plan to get rid of the bad debt, credit cards being the “baddest”. Focus on writing down good debt, such as a mortgage, by making additional payments as your cash flow allows.
Monitor your cash reserves. Prioritize cash savings if you do not have at least three months of spending set aside. If you have more than a year’s savings set aside, and do not anticipate needing it for a large purchase or investment in the next two years, look to invest the excess in longer-term opportunities.
Review your insurance policies. Your needs and life will change while your policies do not automatically keep up. Consider all of the kinds of insurance: home, auto, life, disability, umbrella, pet and health. Review and look for opportunities to lower premiums or do away with redundant policies.
Consider your estate plan. Perhaps you still need to get a plan. Are you sure that your beneficiaries are the right loved ones to receive your assets? Have you done a Letter of Instruction? Click here for our letter.
Set goals. Your budget can also be your goal setting so if that’s a useful tool, stick with that. Otherwise, write down your intentions for the year. Do not make them a diary entry lest they become an historical memento; post your goals where they become daily reminders of where you want to be in 2020.
Sources
3. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html, based on S&P 500 return and 10-year US Treasury bond.
5. Mohamed El-Erian is the Chief Economic Adviser at Allianz, https://www.cnbc.com/video/2018/10/10/moving-from-liquidity-driven-market-to-fundamentally-driven-market-el-erian.html
DISCLOSURE
Statements on financial markets and economics are based on current market conditions and subject to change without notice. Due to the rapidly changing nature of financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction. We provide information from reliable sources but should not be assumed accurate or complete.
Investment Advisory Services offered through Integrated Advisors Network LLC (IAN), a Registered Investment Advisor. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.
This information is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Serene Point Advisors and its affiliates do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.
