Monthly Outlook: October 2018

September felt like a busy month in the markets but when all was said and done, it was only a marginally positive month.  U.S. stocks gained a mere 0.19% with Energy and Healthcare sectors outperforming the broader market.  The tech-heavy NASDAQ actually lost a scant -0.28% in September.  International stocks were also lackluster, gaining just 0.44% for the month.  Europe is still bogged down with Brexit talks and trade tariffs are hurting Emerging Markets.  The big difference between U.S. and international stocks, and we can’t point this out enough, is that U.S. stocks continue to trend higher while international stocks are trending lower.  As a reminder, we define the trend as whether the index is above or below its 200-day moving average.  For this reason, we remain heavily invested in U.S. stocks for growth and under-weighted international stocks for protection from loss.  Lastly, bonds lost -0.55% in September on rising interest rate concerns.  We’ll discuss interest rates later in this Outlook.

Focus on VOTUS

From a purely market perspective (not political) it’s apparent that investors prefer lax regulations, low taxes, access to easy credit, and open markets.  Although the U.S. citizenry seems quite split politically, the markets have embraced Trump as POTUS, tweets and all.  In September, all eyes turned to another branch of government with the nomination of a Supreme Court justice (SCOTUS) that would clearly tip the balance of the court to conservative.  As of today, this nomination is hotly contested and watched not only by a divided citizenry, but by the markets.  Depending on the outcome, there will very possibly be a strong push-back from Voters of the U.S. (VOTUS – I think I just made that up) in just 36 days at the upcoming November 6th mid-term elections.  From a market perspective only – again, no politics – a Republican loss of the House and/or Senate would likely impact markets negatively.  Such a change would make it harder to keep low taxes, lax regulations, and other factors discussed above.  We expect a lot of news coverage about the mid-terms over the next month and we’ll be watching the market reaction carefully.

Interest Rates – Rising or Not?

The U.S. Federal Reserve (the Fed) raised the Fed Funds rate again last month by another quarter percent to 2.00-2.25% target.  As a review, they started gradually raising Fed Funds three years ago (late 2015) after dropping the rate to 0% after the 2008 financial crisis.  And the Fed has told markets that it intends to raise them again in December and probably 3 times in 2019.  That would put Fed Funds at 3.00%-3.25% next year.

When we analyze interest rates, it’s important to remember that the Fed only controls the Fed Funds rate, the rate that banks pay each other for overnight funds.  It’s the market that sets all the other rates, from 90-day T-bills to 2-year, 10-year, 30-year and so on.   Today, the 2-year US Treasury bond rate is 2.81%, the 10-year is 3.05%, and the 30-year is 3.19%.  Rates seem to be converging and stalling out at about the 3% level.  Both the Fed and the market seem be telling us that rates will go to 3.00%-3.25% and perhaps no higher.  If so, then bonds will offer a decent total return going forward and that’s what we’ll be watching.

Driving Cautiously with iFolios

It’s been a good 10 years for investors.   This is especially true for U.S. stock investors.  For the past 10-years, U.S. stocks have gained about 12%/year while international stocks have gained only 6%/year.  But over the past 50-years, they’ve both averaged about 11%.  We remain global investors and look for growth opportunities wherever we find them.  Today, we have a full allocation to U.S. stocks but an under-allocation to international stocks.  We’re neutral on bonds.  We’re never going to have 100% of our managed portfolios invested in any one asset class (like NASDAQ stocks) so it’s a difficult apples-to-oranges comparison to make.  Instead, we’re focused on diversifying globally, growing steadily, and avoiding “the big loss.”  Our track record proves we’re good at it.  We’re confident that our iFolios strategy for growth and protection is perfect for today.