Disclaimer: These are the views of Summit Financial Consulting and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
Rate Hike & Election Fears Scare Market
For the third month in a row, both the S&P 500 and the bond index fund AGG were negative for the month. October was much scarier than the previous two months, as the S&P 500 lost nearly 2% and the bond index (AGG) was down over 1% (Source: Finance.yahoo.com). This was the worst month since January for stock indexes, and the worst month for bonds since June of 2015 (Wall Street Journal, 11/01/2016). The healthcare sector (ticker XLV) was especially hit hard, and dropped 6.6% in October (http://finance.yahoo.com/quote/XLV?p=XLV).
We helped to mitigate losses in our portfolios at TD Ameritrade by avoiding Healthcare, holding a large amount of money in the money market, and by adding Utilities, Real Estate, and a Gold Bullion fund. Overall those investments profited while other investments, including stock indexes and bonds, lost. The past year has been one of the most difficult economic environments to manage a portfolio in our company’s history because the markets have been unusually unpredictable. The heated election season, and an indecisive Federal Reserve have only compounded the situation. It is our belief that in many ways the markets will get “back to normal” after the election and this will provide a more conducive environment for portfolio managers. According to the stock market almanac, it does not matter whether a Republican or Democrat are in office historically, performance is essentially the same. However, the first two years typically under perform the last two years of a presidential term going back to 1833 within the Dow Jones Industrial average. There are a lot of examples that buck the trend however, so we will remain vigilant.
In many cases, when stocks are down, bonds are up, but this is no normal year.
It is our belief that the Federal Reserve will most likely increase interest rates in December. This will have a short term negative effect on bond investments and the stock markets in our opinion based upon our research of the current environment and history. After the Federal Reserve raised rates in December of 2015, the S&P 500 lost over 13%, and a similar outcome after this December is possible. In 2015, bonds lost leading up to the interest rate hike, but then made back all losses and then swung to a nice profit afterwards. The way we see it, there are two likely scenarios in 2016:
1. Economic data comes in bad, a rate hike is delayed, which would be good for bonds in the short term and long term.
2. Economic data comes in good (enough), a rate hike occurs in December, which results in bonds losing in the short term, but recovering those losses and then swings to a profit in the following months as the economy is slowed by higher interest rates.
In both scenarios, it makes sense to hold onto our bonds longer term. Other scenarios are of course possible, and if that appears to be the case, we’ll attempt to act swiftly and adjust. Within our TD Ameritrade managed portfolios, we took a “safety first” approach and that was appropriate since both stocks and bonds lost overall for three consecutive months. If economic data begins to accelerate rather than decelerate, we will likely make drastic adjustments to our portfolios, but for now, we will continue to look for investments that we perceive to be a good value when the timing is right.
If you are a client and disagree with any of the moves inside your portfolio, if you would like to update us on your risk tolerance preferences, or if you have had a dramatic change to your income or financial situation, please contact us to discuss it
Please feel free to forward this commentary to a friend, family member, or co-worker. If they would like to be added to our free commentary, please send us an e-mail at info@summitfc.net at your earliest convenience.
Interesting Points
Just one in five millennials has tried a Big Mac. – Wall Street Journal, October 11, 2016
Households that used a financial advisor were three times as likely than those without an advisor to have $250,000 or more stashed away for retirement. – MarketWatch, October 5, 2016
Prices for televisions fell 20% over the past year, continuing a six-decade decline in costs. In fact, adjusted for changes in quality, televisions today cost less than 3% of what they did in 1983. – Eurasiareview.com, September 20, 2016
It takes 165 pounds of raw material to produce an average cell phone. – The Wall Street Journal, September 26, 2016
Global hunger is at “historic lows” and at the same time, the number of worldwide democracies is at a “historic peak.” – The International Food Policy Institute, May 13, 2016
“According to the IMF, the world is awash with $152 trillion dollars of debt, an all-time high, which is more than double the balance at the start of the 21st century.” – CNBC, October 4, 2016
The high-school graduation rate in the U.S. reached an all-time high of 83% in the 2014-2015 school year, marking the fifth straight record-setting year. – Bloomberg.com, September 27, 2016
Worker productivity fell in the first quarter of 2016 to the lowest levels since the 1980’s. – Wall Street Journal, May 2016
When police officers in six departments in the U.S. and the U.K. began wearing body cameras, complaints fell by 93% over 12 months. – MarketWatch, October 12, 2016
Murders in the U.S. rose 10.8% in 2015- the largest single-year percentage jump since 1971. – The Wall Street Journal, September 26, 2016
“If attacked by a mob of clowns, go for the juggler!” – Anonymous
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services offered through Summit Financial Consulting LLC, a Registered Investment Advisor in the State of Michigan.
