Second Quarter Market Summary
A solid second quarter for both equities and fixed income have helped create excellent year-to-date numbers. Although economic growth appears to be slowing, the global economy is still growing. Despite trade and geopolitical concerns, the US economy continues to grow at a modest pace and inflation remains slightly below long-term targets.
Fed policy continues to give investors confidence in the markets despite the slowing economic numbers. Federal Reserve Chair Jerome Powell stopped short of declaring a cut to rates, but made it clear that the monetary policy would be stimulative if necessary. These comments created a tailwind for US stocks, bringing the return for the US stock market to 18.7% for the year.
The expectation of a rate cut boosted fixed income returns. The Barclay’s Aggregate Index returned 3% for the quarter and is up 6% for the year. High Yield Bonds are up nearly 10% for the year as rates have come down and investors have taken on risk assets.
Below is a table highlighting various market index returns over the past 3, 6, and 36 months:
American households are richer now than they have been at any other point in history. As seen in the chart below, household net worth (assets minus liabilities) levels fell during the financial crisis and have steadily increased during the 10-year recovery.
Household debt service ratio (debt payments as a percentage of disposable income) has declined significantly since 2008. As of the 4th quarter 2007, debt payments accounted for 13.2% of disposable income. That number now sits at just 9.9% (see below). As financial assets have grown, consumers have not added debt to pre-recession levels. Low interest rates have also helped keep the debt service ratio lower.
Now that we are 10 years into the bull market, the topic of protecting the gains seems to come up more often than it did just a few years ago. As seen above, investors feel wealthier and want to are often afraid to go through another financial crash. While we are not calling for a recession or a crash and the economy continues to grow at steady levels, there are steps you can take today to help yourself avoid making mistakes during a downturn. Below are five ways to help withstand a downturn.
- Turn off the news
The rise of the 24-hour news cycle has created an environment where investors are hyper focused on what is happening at the moment. Time and time again, research has shown that one cannot time the market with any level of consistency. Instead, investors need to be focused on the long-term. The news stations exist for one reason, to sell advertising!
- Build an emergency fund
If you have drawn your savings down or have not yet built an emergency fund, now is the time to beef up your savings account. When a recession comes, investment portfolios tend to fall and the jobs market tends to become less stable. Having an appropriate emergency fund readily available will give you an attractive option relative to liquidating investments.
If you’re just starting to build an emergency fund but find it difficult, start small and make it automatic. Making it automatic will ensure that you are saving without having to think about it. If you get a one-time payment from selling something or from additional work, take part of the pay and add it to your emergency fund.
- Improve your cash flow
Falling interest rates in the first half of 2019 has created an attractive time to take a look at refinancing outstanding loans. Reducing your interest rate on loans can lower your monthly payments to increase cash flow or allow you to pay the loan off more quickly by making additional principal payments.
Depending on your situation, you may be able to add income more easily than cutting expenses. This can be done by taking on more work or simply taking a look at your paycheck to make sure you aren’t paying too much in federal and state tax withholding. To cut expenses, take a look at your reoccurring subscriptions to make sure you aren’t paying for services you’re not using.
- Stay balanced
After years of strong returns, it is easy for investors to be overweight their equity targets. Rebalancing is simple to put off when things are going well. Often, investors tend to hold off on selling their winners and opt for selling what has done poorly to buy more of what has done well, essentially selling “low” and buying “high.”
Rebalancing is about making sure that your risk/reward trade-off is in-line with your goals for the long-term. Making sure that you stay at or near your risk targets will help you smooth returns over time and improve the odds of reaching your goals.
- Prepare for upcoming expenses
If you know an expense is coming up in the near future, consider how you plan to fund it. Especially when markets are at all-time highs, if you plan to take the funds from your portfolio it may be appropriate to sell assets now and set the cash aside. By putting the cash in a savings account that is secure, you know the funds won’t lose value between now and when you need the cash.
For funds that you know you will need, but the time horizon is two or more years away, it still may be appropriate to reduce the risk being taken to limit the downside. The further out the cash is needed, the more risk you can typically take.
If you need help trying to apply to the above to your situation, give us a call.
JR Geld, CFA, CFP®
Philip E. Huber, Jr, CPA, CFP®