Fall 2018 Market Quarterly

Goodbye Summer

The summer of 2018 here in CT had two versions. Version one through most of June had lots of sun and hot temperatures. The second version starting in late June was still very hot, but included a veritable flood of rain. All you can do is roll with it. I hope you all had an enjoyable summer and managed to stay cool and dry wherever you were. It’s time now to enjoy fall and prep for winter.

August 22, 2018 was Sandra’s and my 20th wedding anniversary. The photo above is a selfie we took in upstate NY where we celebrated on vacation. Being married for twenty years, and happy on top of it, takes effort from both of us. Working together to build and manage our business adds another dimension, but for us it’s exactly what we worked toward for many years. We consider ourselves very lucky to have each other, and we want to thank everyone for the kind wishes they sent for our anniversary. Note to friends: don’t be concerned, the beard is long gone.

Last Quarter Round Up

The third quarter of 2018 was a decent quarter for most markets. At the top of the list, the U.S., as represented by the S&P 500 index had a great quarter, up +7.71%. YTD for the U.S. is +10.56%. International markets were up +1.35% for the quarter, but down -1.43% YTD. Emerging markets continue to disappoint at -1.10% for the quarter and -7.68% YTD. The U.S. bond market was barely above flat at +0.02% and down -1.60% YTD. Short-term treasuries were up again at +0.49% for the quarter and +1.28% YTD. The rise in short-term treasuries could indicate a degree of uncertainty in riskier assets, especially riskier bonds.

The third quarter was dominated by two major political themes. The first was the upcoming mid-term elections, where it’s not surprising that campaign rhetoric and rallies are in the news. The second was the Supreme Court nomination of Brett Kavanaugh. It’s become a very emotional topic. All I will say is that it represents one of the worst examples of U.S. political dysfunction I’ve ever seen. The U.S. Federal Reserve (Fed) raised the Federal Funds rate again in September by 0.25%. That rate now stands at 2.25%. I generally agree with this slow and ongoing increase in the Federal Funds rate. I am not concerned about monetary policy becoming too tight and risking a recession because Gross Domestic Product (GDP) was 4.2% in the second quarter. With that rate of growth, a 2.25% Federal Funds rate is nowhere near tight monetary policy.

Current Quarter Outlook

In my view, the risk of recession continues to be very low for the remainder of 2018, and even the first half of 2019 looks secure. I think as 2019 progresses into 2020, the odds may start increasing for a slowdown, if not a recession. Trade policy is getting much attention. It’s not yet a trade war in my view. Most of what President Trump says is just rhetoric, and is not adopted policy, at least not yet. So, for me, it’s more like a trade “skirmish.” And, I do believe there is some logic to improving U.S. trade policy. One example might be the Trump focus on China. The U.S. trade policy with China evolved over forty years ago when China was in the early stages of its modern economic growth. The very one-sided trade policy was OK, because the U.S. wanted to help China grow, and possibly encourage them to re-think their communist structure. China exports vast quantities of products to the U.S. market, and puts tariffs on exported U.S. goods to protect their local producers. Now, forty year later, China is the world’s second largest economy, and remains deeply communist. I don’t know if President Trump’s strategies will work, but I think the current trade skirmish could prove beneficial.

My investment strategy is to underweight international investments given the problems in Europe. I will continue to overweight emerging markets, even with the recent poor performance. The ongoing rising interest rates makes bond investing a challenge. Diversification is the key and I’ve added Emerging market bonds to help. I will continue holding equity long/short as an alternative to help manage potential market volatility.

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.