What a start to the new year! In a switch from 2018, every asset class finished the first quarter of 2019 with gains. In fact, U.S. Large Cap stocks (propelled by a resurging technology sector) and U.S. Real Estate had their best quarters since 2009, up 14% and 16%, respectively.
U.S. stock indexes have now recovered almost all of their declines from the latter part of 2018 but have yet to reach their record highs from last fall. Bonds participated in the rally, as well, with U.S. Core bonds up 3%. U.S. oil prices gained 32% in the first quarter, helping Commodities to earn over 6% during that time. Foreign stocks (including emerging markets) gained 10% during the quarter, during what has been a challenging time for them, especially for developed markets.
The markets mainly focused on three developments during the quarter. First, the U.S. Federal Reserve signaled its intentions to stop raising short-term interest rates and to slow the pace at which it was shrinking its $4 trillion asset portfolio. Central banks across the globe, including in China and the Eurozone, also announced similar plans to stop tightening, or in some cases to put in place stimulus measures, to offset declining economic growth. Bond prices rallied as a result, pushing bond yields lower. Real estate stocks also rallied, as did small company stocks, whose earnings benefit from lower borrowing costs.
Second, news reports kept hinting that the U.S. and China were close to resolving their trade conflict, which affects other countries than just those two. Emerging market stocks in particular benefitted from these positive reports. Negotiators continue to meet to iron out their differences.
Third, disappointing Brexit and economic news from the Eurozone (mainly relating to difficulties in its members’ manufacturing sectors) kept coming during the quarter, creating headwinds for foreign stocks. However, foreign stocks did not have the headwind of the dollar this quarter, which was flat against a broad basket of currencies.
| U.S. Large Cap Stocks | 13.7% | U.S. Aggregate Bonds | 2.9% | Global Real Estate | 14.4% |
| U.S. Small Cap Stocks | 14.6% | International Bonds | 1.7% | Allocation 30%-50% Equity | 7.1% |
| Overseas Stocks | 10.0% | Commodities | 6.3% | Allocation 50%-70% Equity | 8.9% |
| Emerging Market Stocks | 9.9% | U.S. Real Estate | 15.9% | Allocation 70%-85% Equity | 10.3% |
Economic Outlook
What about the yield curve? The range of bond yields for short-term to long-term maturities has been flattening during the Fed’s interest rate hikes over the past few years, but the short-end of this “curve” had not yet inverted since 2007, meaning a higher yield on the 3-month Treasury bill versus the 10-year Treasury note. As most news outlets reported on March 22, 2019, the yield curve did invert, although the actual spread was only 0.022% and the inversion righted itself by early April. It is true that the 3-month Treasury yield has exceeded the 10-year Treasury yield ahead of every recession since 1975.
However, there have also been two false positives—an inversion in late 1966 that was followed by economic growth, and a largely flat curve, like the current one, in late 1998 that also wasn’t followed by a recession. Also, many analysts and fund managers believe that the power of an inverted yield curve to predict a recession is no longer as robust given the Fed’s interference in the credit markets from its almost decade-long Quantitative Easing (i.e. buying government bonds for their balance sheet to increase the money supply and lower yields). Finally, it is nearly impossible to predict the actual timing of a recession, and a study by Credit Suisse shows that the S&P 500 has risen around 16% in the 18 months following a curve inversion, going back to 1978.
So what are we to think and do? First, ignore the 24/7 news. Second, know that we will eventually experience a recession, and the stock and credit markets will continue to chug along with some potholes (possibly deep) in the road. Third, know that your Brown Financial investment committee is monitoring economic and market developments on an ongoing basis and is committed to diversified portfolios that should help you navigate the road ahead.
This Is Important
There is good news and bad news associated with recent research. The good news is, according to Social Security Administration research1, you are expected to live longer after age 65 than any previous generation; approximately seven years longer for males and five years longer for females compared to those retiring in 1900. The bad news? You are responsible for paying for it.
In a 2017 study published in the Journal of Financial Planning, Blanchett, Finke and Pfau make the case that “historically high stock and bond prices will lead to lower future investment returns” which, when combined with a longer life expectancy, will make it harder than ever to navigate retirement successfully. Their conclusion2 is to either save more or delay retirement to compensate for the low-return environment.
But what if you have already retired? There is a solution: They suggest utilizing “the potential benefits of strategies that provide greater value in a low-return environment, such as the ability to earn mortality credits through later-life annuitization.” This simply means that you can buy “insurance” to protect your retirement income. This insurance comes in many forms but ultimately can provide a substantial increase in the sustainability of your savings and give you an increased sense of peace of mind that you will not outlive your nest egg. Nearly every retiree can benefit from this protection, but historically, you could only buy this protection from a commissioned insurance broker. Now we can provide these strategies to you on a fee-only, fiduciary platform. If you are concerned and would like to learn more, please let us know.
We truly appreciate the opportunity to work with you and look forward to talking with you again soon!