Like the volatile weather here in Chicago, the markets have gone through some ups and downs, causing jitters among investors. Rhetoric of tariff wars with China, the Russia Investigation and a potential meeting with North Korea have are just some causes. Meanwhile, the economy is doing very well and the jobless rate matches a 48-year low with wages picking up. Because we know that markets overreact in the short term and cause volatility, being a prudent investor requires us to keep a long-term focus. Keeping a long-term outlook helps clarify markets and lead to better decision making. Let’s take a look at how keeping things in perspective may help us direct our portfolios.
Summary, Last Quarter: Since the beginning of the year, the stock market has been acting like a seesaw. Last quarter was no exception. The S&P 500 saw continued volatility, however the trajectory was tiled upward. That’s encouraging as it implies that, while there are short term political worries, the economic story behind the scenes is supporting higher prices (higher demand), which translates into a higher market.
The Federal Reserve raised rates by a quarter point in late March, as expected. An interesting development on this front is that the Federal Reserve is in a position that it hasn’t been since 2005, which is interest rates being above the rate of inflation, assuming they raise rates at their next meeting, as expected. That changes the interest rate land scape from a “when to raise” game to a “when to stop raising” game. It may take some time for that dynamic to materially take shape, but this signifies the end of rates being too low and the worry of not being able to drop rates if needed. This puts the Federal Reserve in a place where they want “neutral” rates, or rates that neither speed up the economy nor slow it down.
Our Commentary: With a Federal Reserve in a “neutral” rate position, a very good job market and now, finally, wages starting to go up, we think we have a positive near-term outlook for the stock market. The bond markets are still trying to deal with rising interest rates, but there seems to be light at the end of the tunnel there. Additionally, international tock markets, especially emerging markets, continue to look attractive. Thus we think investors should hold through the stock market volatility as we think markets are a bit undervalued.
We think investors should still favor the U.S. equity markets over international markets with some exposure to both. Bonds continue to struggle with a rising interest rate environment but there seems to be light at the end of the tunnel for this area. We favor large company growth stocks and for investors that can afford to take on the risk, smaller company stocks are a nice addition to a portfolio.
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Our Investment Committee periodically monitors the markets and will continue to provide comments at the beginning of each quarter. Each portfolio is different and we recommend getting individual help, which we are happy to provide.
See you next quarter!
Bond Disclosure: Fixed income securities carry interest rate risk. Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Forward-Looking Statements: Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
Opinions voiced are not intended to provide specific advice and should not be construed as recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial professional.
Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results.
International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods. Past performance cannot guarantee future results.
Investing in stocks includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.