Triple T’s Buffet Markets

Chapin Hill Advisors, Inc. Market Comment 9-2-19 

Tweets, trade wars & treasuries…

As Trump continued to tweet out threats on tariffs and his administration seemed to contradict him, the markets reacted on both hope and worry. Hopes abounded for a resolution with China regarding tariffs on imported goods as exports from the U.S. and helped to push the markets up for the week ending August 30th. Treasury yields fell to the lowest levels on record in reaction to the addition of another $3 trillion in negative-yielding global bonds, bringing the total to $17 trillion.

The iShares Core U.S. Aggregate Bond ETF (AGG) which tracks the benchmark for taxable bonds in the U.S. gave investors 2.73% return this month. While stocks had a good last week of August, returns for the month were negative. The Dow gave up 1.7% to finish at 26,403 while the S&P 500 lost 1.8% closing at 2926. Nasdaq also fell 2.6% to send the week at 7962. The final numbers belied the volatility of the month. If you had been on vacation for the entire month, you might have thought nothing happened.

Many Wall Street firms as well as their advisors recommend that clients invest their liquid assets in a 60/40 asset allocation. The 60% is allocated to equities and further diversified among U.S. and foreign as well as large, mid and small cap stocks. The 40% is the fixed income allocation.

With bonds having a great month and year, this allocation would have allowed investors to reap the return from bonds and add in the positive year-to-date return for U.S. equities. According to Barron’s, a 60 S&P/40 AGG (ETF for bonds) would have returned 14.45% through August 29th with 18.16% from equities and 8.89% from the bond portion. This blend also would have outperformed a 100% S&P equity allocation over the past 12-months.

Whether or not bond yields can drop further is anyone’s guess but it seems unlikely that there is much more to go. Prices of bonds react opposite their yields. So as yields drop, prices rise and vice versa.

The 30-year Treasury hit all all-time low this week of 1.91% while the 10-year hit 1.5%, the lowest since 2011. Expectations are built in for the Fed to reduce rates five times between now and the end of 2020. Should the reductions not take place, bonds would likely fall in price. Going forward, a 60/40 portfolio may not be enough to protect your principal, especially if rates begin to rise as bond prices fall.

September looms…

September has been the worst month for the Dow and S&P 500 since 1950 and for Nasdaq since its inception in 1971. September’s returns are worse when following a negative August according to Lance Roberts, founder of RealInvestmentAdvice blog.

He noted that consumer sentiment is still very positive and investors may be worried about their portfolios but have not really taken action. With the conflicting advice from the various Wall Street firms, it is hard for investors to know what to do to protect their principle.

The trade wars escalated over the weekend as at midnight on August 31st, Trump announced a 15% tariff on $122 billion of Chinese goods. China retaliated one-minute later as they announced a tariff on $75 billion of U.S. goods. This move will really hit Trump’s big supporters in factories and farms.

The 15% U.S. duty will affect everything from footwear and apparel to home textiles and technology. China has a 15% tariff on another $160 billion of U.S. goods, including laptops and cellphones, scheduled for December.

The Congressional Budget Office (CBO) projected that the tariffs will shave off 0.3% from GDP in 2020 and reduce household incomes by $580. JPMorgan estimated the cost per household will be $1000/year but that was calculated with tariffs at 10% and not the current 15% so the hit is likely to be larger if the tariffs are implemented.

Wealthy pullback on spending…

Consumer spending comprises 70% of GDP in the U.S. While the average consumer continues to rack up debt while they max out their consumer credit cards, the wealthy are pulling back. ZeroHedge reported data from Redfin tracking home sales in the $1.5 million plus range slowing by 5%. Inventory in is at a 3-year supply in both the Hampton’s N.Y. and Aspen, CO. key luxury destinations. Retailers catering to the 1% are struggling as Nordstrom’s reported its third consecutive decline in earnings and Barney’s is filing for bankruptcy.

Pebble Beach famed car auction just took place and sales of cars of $1 million and up lagged with only half the cars were sold. The relative bargain cars at $75,000 and under sold briskly and were frequently bid up. Sotheby’s reports a decline of 10% in their 2019 auction sales while Christie’s total has fallen 22% year over year.

Seatbelts belted for more volatility….

As everyone gets back to work and the effect of the latest tariffs sink in, we should expect volatility in the markets to continue. While most commodities have had a difficult time, gold has continued to shine.

Be aware of how much risk you have in your portfolio including both fixed income and equity allocations. Very often, we find investors have overlapping positions via different funds and managers and therefore can be more exposed to an asset class or particular stock then they may have realized.

We are always happy to provide a complimentary meeting and overview of your portfolio as well as your financial objectives and risk tolerance.

As always, feel free to reach out with questions, comments or concerns.

This information is provided for general information only, and is not intended as personalized investment advice. Reading the above is in no way intended to be a substitute for individualized investment advice, and no conclusions should be drawn from this information regarding any potential investment. All readers should contact their professional investment, legal and tax advisors before entering into any investment or investment agreement. Past performance of any index, market, sector, or investment is not necessarily indicative of future returns. Any index referenced herein references historical results. They are also unmanaged and cannot be invested in directly. Some information in the above is gleaned from third party sources, and while believed to be reliable, is not independently verified. Please contact Kathy Boyle for more information at [email protected].