Client Letter 2019 Q3

2019 Vacation

As we do each year, we want to advise all Portfolio Management clients about our upcoming vacation plans. We will be out of the office from Wednesday, August 21 through Monday, September 2, 2019. We will be back in the office on Tuesday, September 3. During this time, we will have limited access to phone and email, but if you need us, please call the office number and leave a message with John or on voicemail. We will respond in a timely manner. You can also call Fidelity with account related questions at 800-544-6666.

Q-2 2019 Market Results

The markets were surprisingly strong in the second quarter, especially considering the strong first quarter. The U.S. S&P 500 index was up +4.35%. The international market index was up +3.68% and emerging markets were less exciting, only up +0.61%. Global ex-U.S. fared well at +2.98%. Bonds did quite well with the U.S. aggregate index up +3.08% for the quarter. Short-term treasuries also did well at +1.46% for the quarter.

For most markets, the second quarter started in the positive direction, but took a turn for the worse in early May. This appeared to be related to the breakdown in trade talks between the U.S. and China. By the beginning of June, the markets seemed to recognize that the U.S. and China are using the trade talks as a political tool to send messages to both their own political base, and their trade rival, for maximum effect. The S&P 500 index hit a new all-time high on June 20, 2019.

Portfolio Thoughts

The second quarter of 2019 was a solid quarter for most investors. Equities (stocks) did well in both the U.S. and International markets, and bonds did well too. Thus, both aggressive and conservative investors saw decent results. Momentum portfolios were strong as the model continues to see the U.S. as having momentum, and the U.S. has complied. Tactical and Strategic portfolios benefited from the diversification and the rebalancing trades we made during the quarter. For the coming quarter, I will be adding exposure to U.S. large value and short-term bonds. I’m reducing exposure to small cap stocks and long bonds. I am also eliminating the equity long/short position in favor of investments in real estate.

Q-2 2019 Notes

The Federal Reserve (Fed) did not raise rates in June, nor did they reduce rates as some analysts expected. The Fed held steady, but the comments from Chairman Powell were decidedly more dovish (meaning: a lower interest rate bias) than what we heard in March. With the most recent annual Gross Domestic Product (GDP) coming in at +3.2%, and unemployment at a fifty-year low, I’m not sure I fully understand the dovish tone. While I’m open to the idea that interest rate increases might be put on hold while we continue with trade negotiations, lowering rates is a step in the opposite direction. The U.S economy, while not as strong as it was in 2017, is still strong, and we’ve just hit the milestone of this being the longest economic expansion in U.S. history. My best guess is that the Fed’s tone may be in response to seeing evidence of slowing in the global economy and being cautious about the steps they might need to take to avoid recession.

Looking at global topics, Iran has been in the news lately and I’d like to spend some time on it. Iran is a large country, 17th largest in the world, with a population of about 70 million people, which is more than France or Great Britain. Beyond size, Iran is shaped by its geography, which is extremely mountainous. The country is virtually surrounded by mountains with the northwest, west and southern regions most dense and the east and northeast regions somewhat less dense. And the population lives in these mountains and their foothills. The flatter center of the country is nearly uninhabitable due to expansive desert and salt-encrusted mud flats. This geography has led Iran to be a very defendable and stable land power. It has also led to a concentration of ethnicity. Iran, except for a small region in its extreme south, is almost entirely ethnic Persian. This means that Iran’s population is ethnically different from the rest of the Middle East where Arabs, Kurds and Turks predominate. This helps explain some of the ongoing animosity between Iran and the dominant Arab states such as Saudi Arabia.

In 1979, Iran went through a radical change as a revolution deposed the U.S.-backed Shah and put a Shia Islam, theology-based regime in its place. Both the new government and the general population held bad feelings toward the U.S. because of its support for the former Shah. Iran’s geography makes economic development difficult because transport through mountainous regions is expensive, and there are no habitable plains where industry can grow. Oil is by far the biggest economic resource for Iran, and they have one of the largest oil reserves in the world. But the combination of their geographic, ethnic and Shia vs. Sunni Muslim isolation has prevented the oil industry from developing into a modern power. Because of these economic obstructions, Iran has always relied on the plains and wealth creation to its direct west, in Iraq and further into Syria. This is the reason Iran continues to support proxies in these areas. As U.S. and Iranian relations continued to deteriorate, and Iran’s economic development stalled, Iran has chosen the path of becoming a rogue nation by pursuing nuclear weapons and developing missile technology as a potential means to deliver them. This resulted in Iran coming under sanctions from most of the world, which set the Iranian economy back even more. After a brief respite from sanctions as part of the JCPOA (a.k.a. Iran Nuclear Deal) during the Obama administration, Iran has found itself back under heavy sanctions, which reportedly have been very damaging to their economy. Recently, and allegedly in response to this economic downturn, Iran has been accused of attacking oil tankers near their coastline and of shooting down a U.S. drone. The U.S. showed restraint by not responding militarily, but did respond with a cyber-attack designed to affect Iran’s intelligence gathering system. As I’m sure you can see, Iran has limited options. Its hard line government has no interest in warming relations with the U.S. for sanctions relief. But without sanction relief, the Iranian economy is in downfall, and they do not have the resources to pursue opportunities to their west. All the while, they have a younger population that doesn’t hate the U.S. the way the revolutionaries did in 1979 and are tired of being poor and want a better life. And therein lies the challenge we see with Iran. If the Iranian regime won’t come to the table to negotiate, their society may decide they’ve had enough with the Islamist government and form their own revolution. And that is where we stand now. The U.S. ultimately wants regime change.

As always, I will watch and research the global economy and make investment choices to the best of my ability for each and every client portfolio. If you have questions about your portfolio, my views expressed in this letter, or anything else financial, please do not hesitate to call.
Best Regards,
Jim

Best Regards,

Jim

Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Connecticut Department of Banking.

This newsletter is for general information only and should not be considered investment advice.  Investors should consult with a trained investment professional to discuss their particular situation.