The Market: September 2019

We are back from the summer and the stock market is, despite some big up and down days, pretty much at the level where it began the summer. The bond market is a different story, interest rates in the US and Europe steadily declined throughout July and August. More than $14 trillion of bonds yield negative interest rates. Rates and bond prices move in opposite directions and as rates have fallen, returns on bonds have been stellar. From July 1 to August 30, the US long-bond was up just over 11%. This compares with a 1% decline over the same period for the S&P500. Globally, investors are clamoring for “safe” assets. Government bonds, gold, consumer staples stocks, utilities, and REITS have seen positive inflows and prices that have been bid up. The markets are trying to grapple with several factors and investor appetite for “safe” assets is a reflection of the concerns. The global economy has been slowing, causing many to fear that a recession is inevitable. Whether the escalated trade war is the cause of the slowdown or whether the conflict has just increased the pressure on the brakes, trade is nonetheless an important factor. Any positive resolution would be bullish for stocks and would likely cool off the bond rally. Perhaps an under-rated concern is Brexit. Maybe the markets were desensitized given that Brexit has been in the news for so long. However, as the October 31 deadline is rapidly approaching, the separation of the UK from the EU has become real. It’s understandable how investors have been behaving. Trade and Brexit add great uncertainty for businesses and consumers. Both hold back expenditures which slows the economy and puts a question mark over future corporate earnings. The uncertainties may ultimately lead to recession and the “safe” assets that have been so popular will continue to work well. However, a word of caution. As an asset’s price goes up, so does the risk. What is “safe” today might become “risky” tomorrow. If there is a resolution on trade and Brexit, investors will exit the “safe” assets all at once and the prices of these assets will tumble. With this in mind, the important lesson for investors is that they should stick with their financial plan and asset allocation regardless of emotion and fear or greed. Similarly, investors should maintain a balanced asset allocation that incorporates “safe” assets and “risk” assets, consistent with long-term goals. Rebalancing becomes essential so as to not let certain asset classes or sectors become too great a percentage of total assets. It’s also important to not let fear keep you out of the markets. Missing the big up days can reduce returns dramatically. Fidelity looked at the growth of $10,000 invested in the stock market from 1980 to 2018. If an investor missed the five best days the growth of $10,000 was reduced from $708,143 to $458,476. It is time, not timing that matters. — Ian Green, Pendragon Capital Management