3rd Quarter 2019
Summer is a breath of fresh air. It’s wonderful to enjoy the longer days and spend time outdoors with friends and family. Many of our clients and friends have shared vacation stories with us. We love to hear them. We hope that you are enjoying yourself too.
The financial markets provided a great deal to be happy about as well. After the sharp drop in the fourth quarter 2019 and the rebound in the first quarter of this year, markets continued to rise. The major indices broke through to new highs on June 20, 2018, and continued rising. As of June 30, the US large company market as measured by the S&P 500 was up 18.5% year to date1.
What created the fuel for this continued growth in stock prices? How much longer can it continue? We will explore these topics in the next few pages.
Quarter Market Review-YTD as of June 30, 2019
Bloomberg Barclays US Aggregate Bond Index
S&P 500 Composite Index
Russell 2000 Index
MSCI EAFE Index
MSCI EM (Emerging Markets) Index
*Source: RJ Quarterly Market Review 2Q 2019
There are two main drivers to the continued strong performance of the markets. The first is the strong US economy. The second is an accommodative Federal Reserve, which is keeping interest rates low.
The economy continues to impress. GDP grew at a pace of 3.1% in the first quarter of 20191. Unemployment continues to hold at very low levels, with job gains made across all demographics and levels of income. Corporate profits are expected to continue growing, but at a slower rate.
The current expansion, now at 120 months2, is a long one from a historical perspective. Previous expansions have lasted 48 months on average2. This seems to be influencing investor feelings about the current bull market. No investors we talk with seem terribly optimistic, although the strong economic numbers also prevent many investors from feeling pessimistic. We feel stuck in the middle.
Economic expansions do not die of old age. Something stops them. In the past, this can be separated into one of two things. First, the Federal Reserve may raise interest rates above the level that the economy can handle, causing the expansion to slip into recession as companies struggle with borrowing costs. Second, it can be an outside event.
The threat of the Federal Reserve raising interest rates and killing the expansion seems to be off the table for now. In December, the stock market dropped almost 20% when the Fed raised rates
at a time when there was growing concern the economy could not handle it. Today the Fed has reversed course, signaling they may cut rates over concerns about slowing economic growth. The stock and bond markets liked this message, and both rallied after the news. We think the market overreacted in December, and it may be overreacting to the prospect of rate cuts today. The bottom line is that higher rates to slow the economy are unlikely to be a factor in the near term.
This leaves outside events as a possible
- Brexit: The exit from the European Union still hasn’t been negotiated. The odds of a messy “no-deal” Brexit seem to have grown. There is considerable uncertainty for businesses working across borders, and by extension for the financial markets.
- China Trade Dispute: The US and China trade war continues with tariffs, technology bans, sanctions, and arrests. The US has justifiable complaints over trade practices, especially intellectual property theft, and these are the immediate target of the tariffs. We think it is important to realize this is one chapter in a larger story. China remains a largely poor, rural country, and its leadership is intent on evolving into a global economic, political, and military power. The Chinese view dependence on the US-led world order as a significant vulnerability and will continue to try to build economic and political ties with other nations to expand their sphere of influence, while trying to create alternatives to the US dollar-based global monetary system. We expect the China US conflict to continue even as the current trade spat is resolved.
- Hong Kong protests: For over a month, massive protests have captured the attention of the world as Hong Kong residents objected to a proposed extradition law that would further erode their freedoms from the mainland China government. The protests have continued, but China has signaled that its patience may run out. Any crackdown risks eroding Hong Kong’s place as a center for finance in Asia.
- Other Trade Disputes: The Trump administration hasn’t just focused on China. They have also threatened allies such as Mexico, Canada, and France with tariffs or retaliatory actions. In trade wars, everyone loses, especially the end consumer.
- Cracking down on Big Tech. The markets have been led by the big US technology companies such as Google, Amazon, and Facebook. These companies now face scrutiny in the US and Europe over privacy and monopoly concerns. Legislative or judicial actions could affect US technology dominance, the individual companies, and the markets as a whole.
- Iran. Tensions with the US continue to rise. Recent actions include heightened sanctions by the US, a downed drone by Iran and a military strike by the US that was called off, and tense military encounters in the strait of Hormuz. At stake for the US and its allies is nuclear proliferation; for Iran the survival of the regime. The US has little appetite for armed confrontations, but tough sanctions are putting pressure on Iran. The confrontation risks disruption to the world’s energy markets. US shale oil production has steadily reduced the negative consequences of such a risk, but it could still cause disruption.
- US Elections. It’s becoming more ugly and noisy as election season arrives. Looking past the noise, we think it highly unlikely there will be significant legislative changes until after the election due to the divided Congress. Our best guess at this time is the Democrats will keep the House and the Republicans will keep the Senate, meaning major legislative change will remain elusive regardless of which party wins the Presidency.
- Negative Interest rates: Monetary authorities around the world have issued approximately $13 trillion of debt (Market Watch using Bloomberg data 6-21-19) as they try to stimulate their economies. This is a carryover from their attempts to stimulate after 2008 and is unprecedented. Having negative interest rates does not make sense to us. We are concerned about how it will finally play out, but probably an issue farther in the future.
While any of these could cause challenges, they are not our best case scenario. Outside events such as these are unpredictable, which reinforces the importance of diversification, managing liquidity for spending needs, and keeping longer time horizons to ride through inevitable market uncertainty.
Things You Need to Know
Fun things first-- save the date of October 23 for a fun evening with the team at Kreitler Financial as we host Dr. Mark Liponis. Dr. Liponis will discuss Ultralongevity: The Seven Step Program for a Younger, Healthier You. He will present his idea: that aging and aging-related diseases---including heart disease, cancer, and diabetes---are autoimmune problems, and that a well-managed immune system is the key to healthy aging. He will help us put the program into practice so that we can keep our minds sharp, become more physically fit, be more resistant to infections and disease, and feel and stay younger than ever imagined.
Raymond James will make changes in July to the Client Access web site to require two-factor authentication. The technology has been optional and will be required going forward. We encourage you to use two-factor authentication where possible, as it remains the gold standard for account security.
Connecticut passed a new budget, and taxes went up for most people with earnings. Included in it was a new 0.5% payroll tax to pay for the new Family Leave program. Wage earnings will see this new tax deducted from their earnings. Additionally, they made changes to the pass-through entity profit tax that was enacted in 2018, reducing the amount of the entity tax that could be deducted on the business owners’ personal return. Let us know if you have questions about how these changes may affect you individually.
Happenings at Kreitler Financial
Thank you to the many clients and friends who joined us at Consiglio’s on Wooster Street for our Summer Social. In addition to having a great time with friends, we raised $2,600 and several boxes of children’s books for New Haven Reads. This great organization encourages children to learn to read by pairing them with volunteers who read to them. Thank you!
We believe in fostering continuous improvement and growth. Our team makes substantial commitments to ongoing education and personal improvement.
Charlie attended the Raymond James Chairman’s Council Retreat, a two-day series of meetings for the top advisors of RJFS to share ideas among themselves and with senior leadership from Raymond James.
Charlie, Bob, Jake Ness (Financial Planner), and Beau Tillinghast (Relationship Manager) attended the Raymond James National Conference for Professional Development in Las Vegas. While there, the team had the opportunity to visit the Red Rocks National Park, which Bob helped to secure funding for in the 1970s while he worked in the Office of Management and Budget. It was a great experience.
Bernadette Huang (Financial Planner), Dwayne Tyril (Registered Representative), and Sandy Blanchard (Director of Operations) travelled to Austin for the Envestnet/Tamarac conference, hosted by the company that provides our portfolio reporting and rebalancing system, to continue our technology development.
Amy Alfano (Office Concierge) and Kersti Melchiore (Director of Client Experience) attended the Ritz Carlton course on creating outstanding customer service experiences.
Wishing you sunshine and a wonderful summer,
With warm regards,
President, Kreitler Financial
Founding Partner, Kreitler Financial
1Source: Raymond James Quarterly Market Review 2Q 2019
2Source: J.P. Morgan Asset Management Guide to Markets 3Q 2019
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Charles and Robert Kreitler, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad‐based flagship benchmark that measures the investment grade, US dollar‐denominated, fixed‐rate taxable bond market. The MSCI EAFE (Europe, Australasia, and Far East) is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. RJFS does not provide tax advice. You should discuss any tax matters with the appropriate professional. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. No statement within this material should be construed as a recommendation to buy or sell a security or to provide investment advice. Holding investments for the long term does not ensure a profitable outcome. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.
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